Good day, ladies and gentlemen, and welcome to the ePlus, Inc. Fourth Quarter And Fiscal Year Ended 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Kley Parkhurst, Senior Vice President. Sir, you may begin.

Thank you, Abigail [ph], and thank you everyone for joining us today. With me today are Phil Norton, Chairman, President and CEO of ePlus; Mark Marron, our Chief Operating Officer and President of ePlus Technology; Elaine Marion, our Chief Financial Officer; and Erica Stoecker, our General Counsel. I want to take a moment to remind you that the statements we'll make this afternoon that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates and projections. Actual and anticipated future results may vary materially due to certain risks and uncertainties detailed in the earnings release we issued this afternoon and our periodic filings with the Securities and Exchange Commission, including our own Form 10-K for the year ended March 31, 2014 and our 10-K for year ended March 31, 2015 when filed. The Company undertakes no responsibility to update any of these forward-looking statements in light of new information or future events. In addition, during the call we may make reference to non-GAAP financial measures, and we have posted a GAAP financial reconciliation on our website at www.eplus.com. Now I'd like to turn the call over to Phil Norton. Phil?

Thank you, Kley, and good afternoon everyone. We are pleased with our fiscal year and fourth quarter results. For the year we reported fully diluted earnings per share of $6.19, a 42% improvement over $4.37 the prior year. On a non-GAAP basis, fully diluted EPS was $5.59, a 28% increase over the prior year. For the quarter, we recorded diluted EPS of $1.22 as compared to $1.08 last year. Elaine will go into greater detail on these in just a moment. For the quarter, non-GAAP gross sales of products and services increased 4.9%. We feel this is a strong metric given the revenue headwinds, being experienced in the industry. Historically we have been very adept at anticipating technology market trends that assumes in shifting our focus and investments to be well-positioned to capture new opportunities generated by change. Over the past several quarters, we have focused on increasing services and changing the customer engagement model to a total lifecycle model led by an assessment-based consultative approach through managed services and staffing. We believe the shift is taking place across the industry and is a key factor to the success in today's IT marketplace. And the new IT paradigm will converge -- hyper-converge infrastructure cloud and software-defined architectures. We're going to focus on working both with traditional tier 1 IT vendors such as Cisco, NetApp, HP, EMC, and as importantly, with emerging technology vendors. It is noteworthy that we were Cisco's Partner of the Year from the Americas and also NetApp Flexpod Partner of the Year, HP Storage Growth Partner of the Year, and EMC's Breakout Partner of the Year. We are focusing on being the partner of choice for these vendors as well as for emerging vendors in this space. Our diverse and highly-respected consulting and engineering teams have deep…

Thank you, Phil, and good afternoon everyone. We believe the ePlus financial success in the fourth quarter and for the year is a result of our ability to monetize a number of IT trends in the marketplace, specifically CIOs are being charged with achieving more with their existing IT budgets, the complexity of IT challenges and the range of vendor opportunities available continue to grow, and IT departments are increasingly prioritizing the value and flexibility of bundled solutions. We believe ePlus is meeting these objectives with offerings that include managed services [inaudible] integration services of multi-vendor solutions, and flexibility with standard and customized financing solutions to meet today's IT needs across areas such as cloud, big data, security and a host of others. Effectively, customers are looking at companies like ePlus to deliver business outcomes, not just the siloed IT solution. In this evolving environment, we have created a strategic direction focused on business outcomes in a few ways. First, we've created teams that are responsible for evaluating emerging technologies and how these new technologies will fit within our existing focus areas. These teams are responsible for creating go-to market and awareness programs around these solutions. Second, we've continued to refine and build out our PDSO plan that helps our customers to plan, build, support and optimize phases [ph]. PDSO was a major value to our customer in that it helps CIOs identify what options are available to them in a number of ways. First, with a comprehensive set of assessments and health checks that help them understand their current [ph] environments and what they need to consider as they select new solutions. Second, the ability to integrate multi-vendor complex solutions. And third, the ability to support and optimize these solutions through professional services capabilities, managed services, staffing, and overall…

Thank you, Mark. As Phil mentioned earlier, results of the fourth quarter fiscal 2015 showed positive year-on-year comparison, driven largely by margin expansion. Net sales grew 2.8% in the quarter while consolidated gross margin for the quarter was 22%, up 100 basis points from the year-ago quarter. One of the main factors in this margin expansion was an increasing proportion of revenue from the sale of third-party maintenance contracts which are reported on a net basis. In addition, we continue to optimize our product mix to prioritize higher-margin sales, including those associated with advanced technology solutions and services. This consolidated gross margin expansion more than offset an increase in operating expenses. Starting this quarter, we are reporting adjusted EBITDA, a metric we use to evaluate operating performance of our business. We define adjusted EBITDA as net earnings calculated in accordance with GAAP, while there's adjustments for interest expense, depreciation and amortization, provision for income taxes and other income. Certain operating expenses from our financing segment are excluded from adjusted EBITDA. We consider the interest on debt from the financing segment as well as depreciation of assets under lease to be operating expenses. Adjusted EBITDA grew 10.5% in the fourth quarter to reach $16.3 million. Net earnings were $8.9 million or $1.22 per diluted share, up from $8.2 million or $1.03 per diluted share in the fourth quarter fiscal 2014. Diluted shares outstanding were $7.3 million, from $7.9 million a year earlier. Turning now to the results of our two segments, starting with technology. Technology net sales grew 2.8% to $258.9 million in the fourth quarter, up from $251.9 million a year earlier, while non-GAAP gross sales of products and services grew at 4.9%. Non-GAAP gross sales of products and services include revenues from third-party maintenance contracts prior to the reclassification…

Thanks, Elaine. To sum up, we are pleased with our fiscal 2015 results. And we believe we are well-positioned for continued growth. We had chalked up a solid track record of anticipating emerging market trends and today our increased sale gives us feeling greater ability to be at the forefront of change, whether it be the strong demand for security where we have significant expertise, or the migration to more software solutions which benefits our services business over time. Also in fiscal 2016 we expect to be able to leverage the investments we have made in engineering capabilities and headcount as we continue to develop our professional and managed services business. We recently completed a rebranding process which calls out concept of more, in the context of working smarter and doing more to satisfy our more sophisticated customers and to be more efficient. The genesis of this came from both our own organization and a cross section of our top 40 clients, in recognition of how much ePlus has evolved over the years and where we are going. As we move forward in this new fiscal year, we will continue to focus our efforts on gaining more traction with our existing clients where we will have significant opportunity to grow both products and services as well as expanding our customer base through targeted sales efforts across our diversified verticals. We believe we are well-positioned in those areas that are most in demand aimed at security, cloud infrastructure, datacenter and services combined with our increased scale to enable us to continue to gain share and report sales performance that comfortably exceeds the growth rate of the overall IT market. And our Company is fully committed to maintain industry-leading gross margins and investing in people, emerging technologies and consulting services through organic efforts as well as acquisitions. Finally, with more than 2,900 customers and a comprehensive suite of offerings that address today's most advanced technologies, we are very well-positioned to capture additional upsell and cross-sell opportunities within our customer base. For example, we can provide security to our customers that integrated within the solutions they are already buying from us. On that note, operator, we'd like to open the call for questions.

Certainly. [Operator Instructions] Our first question comes from the line of Matt Sheerin with Stifel. Your line is open.

Yes. Hello everyone. First question, just regarding the revenue in the quarter. It looks like you saw a fairly significant deceleration of growth on a year-over-year basis, on a sequential basis your tax segment was down 13% or so, which is the biggest decline in five years. So, just trying to figure out what you saw in the quarter which led to that slowdown. I know you had a very strong December quarter and the comps year on year are tougher. I know one of your suppliers has announced some difficulties. I know the education market is in a pause. But what are some of the reasons that you're seeing there?

Hey, Matt, it's Mark here. So, a couple of things that are probably going on in the market. As you see with a lot of our competitors as well as some of our key vendors, they're all in the mid-single digits to flat to down from a revenue growth standpoint. I think there's a few things also going on at the storage space with some of the legacy storage vendors that's in play. Now with that said, we think we're very well-positioned both with the legacy and emerging vendors in the storage space and with some of the what I'd call customer-facing headcount that we added, we feel very good and positive about what the future holds. I think the biggest thing, when you look at the year-over-year growth, our tax sales last year were up approximately at the gross level like 12.5% year over year. So it's a tough multiple to match when you have that kind of growth in the previous year. Not making excuses, we got a few things with weather that probably affected some of the services numbers, nothing dramatic, so I'm clear. But those would be the bigger pieces. I think overall we feel pretty good about the headcount that we added, the areas that we're focused on, and some of the relationships we're building with some of these emerging technology vendors.

Do you think then, Mark, that we should start to see reacceleration of growth as we get into the back half of the year?

You know, here's the easiest thing, Matt, we believe that we'll continue to take market share from our competitors as we move forward. We think we'll continue to grow our services revenues at a bigger clip than our product revenues. As you noticed, I think as Elaine highlighted, our gross margin was up 120 basis points for the quarter, and that's really focused on more of the, you know, more value-add, higher complex solutions that a lot of customers are looking for. We've expanded our service offerings in terms of - or managed service offerings by offering video, Flexpod managed services, wireless managed services. We're investing in headcount to continue to pull down both the professional services and the staffing that our customers are looking for. So we feel pretty good both from a - where the market is and what we see in our forecast currently.

Okay. And I know you don't break out the revenue from services or as a percentage of your sales, but could you give us an idea of the growth rate you're seeing in that services revenue, not counting the warranty -- the maintenance contracts, could you give us an idea of the growth rates there?

Yeah. So I guess the biggest thing to talk about, so, Elaine or Phil had mentioned that we had 6.5% headcount growth year over year. I would say 85% to 90% of that is what I would call customer-facing, meaning sales account executives and services, systems engineers, both pre, post sales and solution-oriented architecture and consultants. And that's where we're going to continue to, as we move forward, to invest. As I mentioned, without overkilling it, Matt, the offerings that, you know, we built up an on-demand services and staffing capabilities and we're going to continue to build that out. We built out our national presales capabilities so we're able to provide more value to our customers in key areas that they're looking for. And the offerings, you know, the services offerings that I talked about, by adding video, we also extended. So when Elaine talks about the net gross sales through third-party contracts, that's by design at ePlus. We've actually expanded what we call our renewals team, and they're responsible for customer satisfaction and providing the information and the tools from an asset management standpoint that our customers need to manage their assets as they move forward. So we believe that we're well-positioned for renewals. We believe we're well-positioned from a support standpoint. And we believe we're well-positioned to add on the optimized -- what I call optimized services, that managed services, staffing, and what we call enhanced maintenance services, which is where we provide level one and level two support for Cisco and NetApp customers.

Okay. So I'm just trying to get an answer to questions in terms of the growth rate of that business of services, or it sounds like you're not ready to talk about that yet.

Yeah. Matt, at this time we're not ready. What I can tell you, our services growth rate as a percentage will exceed our product growth rate, that I can tell you. And I think the part that I'm trying to give you as much as I can here is that most of the headcount we're adding is in the services space, and I'm trying to highlight some of the offerings that we're building out that are services related. So we think we'll continue to see, you know, our transaction and annuity services continue to grow. And hopefully that'll continue. Based on what we've proved in the past, our gross margin percentages will continue to trend in the right direction.

Okay.

And as I mentioned a little bit earlier, if you look at it, our tech gross margin was up 120 basis points for the quarter and I think was 110 basis points for the year.

Yup, got it. And just lastly, could you tell us what your top customer was as a percentage of sales, Cisco?

Customer or top vendor you mean?

I'm sorry, vendor.

It was Cisco. I think they came in at 48% for the year.

Okay. And any 10% customers?

We had none this year.

You had none. Okay. Okay, I know last year Verizon was a double-digit customer. Is that one reason why maybe the growth rates look slower, because of the lumpiness of that customer?

No, I don't think so, Matt. Because if you look at it on a consolidated, we're up 8% revenue year over year. So if you think about the IT industry as a whole, I think it's Gartner IDC, says it 3% to 4% is what the IT spend is expected. So from a revenue standpoint, we're more than double the industry average. And then when you look at our operating income, that's up at 17.7% --

No, I certainly understand that. I'm just getting -- you've had that one customer was plus 10% last year, now it's below 10%, which means that customer was flat or was down.

Yeah. Hey, Matt, I believe they were approximately flat, but it wasn't a big difference I believe, and I'm going on memory here, I don't have it in front of me. They were just barely over the 10%, Mark, last year. So I don't remember the exact percentage. So we can get that to you --

That's fine. That ballpark is fine. Okay. That's fair enough. Thanks a lot.

No problem. Thanks, Matt.

Thank you. Our next question comes from the line of Prabhakar Gowrisankaran with Canaccord. Your line is open.

Hi. Thanks for taking my questions. Just following up on the previous quarters. Just, can you provide more color in terms of the macro trends? Is there a bigger slowdown in the storage? And if you can compare to networking and converged infrastructure? It sounded like you had some -- a lot of growth in converged infrastructure, but it looks like there was more of a slowdown in storage.

Yeah. Hi, Prab, it's Mark. In terms of -- here, I'll give you two quick things. Why we feel we're pretty well-positioned, the reason we mentioned the awards, the Cisco Partner of the Year, the EMC Breakthrough Partner, the HP Storage Growth Partner, the NetApp Flexpod Partner of the Year, we feel, compared to our competitors, with the resources, the scale and the capabilities we have, we're very well-positioned. As the market to this, you know, from converged to hyper-converged market, if you will, and all the different types of cloud offerings that are out there. If you look at the market as a whole, I think there's probably four things that you're looking at from a macro level that everybody is trying to figure out. It's all about the customer experience, it's about the employee experience. It's about big data analytics and how do you use that from a business risk as well as a business opportunity. And it's about security and compliance. And then if you think about some of the bigger macro things going on, you know, with movement from you traditional disk and hard drive to flash and object storage, you've got a lot of that going on. So I think customers are trying to evaluate what's the right solution for them both in a converged and hyper-converged infrastructure. And then at the true macro [ph], if you start thinking about, you know, the digital transformation that's going on and the internet of things and all the things that that means, I think it just really opens up more opportunities for somebody like ePlus because the internet of things is really just, you know, centers on everyday devices, and then making that data and utilizing that data to provide some value to the customer. So those are the things at macro level. The other thing is everybody is trying to figure out how to harness big data. And obviously they're worried about cybersecurity, both at the Board level and at the CIO level. So that's kind of the bigger-picture things going on.

Okay. And the other question I had was just piggybacking on your -- how are you positioned on these emerging flash and hyper-converged infrastructures? It looks like you're -- some of these newer guys has similar offerings to Vblock and Flexpod offerings. So, how are you positioned with some of these emerging vendors?

Well, I think we're very well-positioned, Prab, because if you think about it, it kind of plays into our strengths. So if you think about the converged players with Flexpod and Vblock and all of that, hyper-converged, really all it is is kind of a preconfigured rack of storage and compute, if you will. So this integrated stack. So it kind of fits within our strengths in terms of the space that we play in. It also plays into the six or seven integration centers that we have across the U.S. So I think it's actually a good play for us. Now obviously with our size and scale, a lot of the newer players in that space are looking for ePlus to help them to go market. So what I had mentioned earlier, we feel we're pretty well-positioned with both the legacy as well as the emerging vendors in that space.

And the last question I had was just in terms of -- it looks like you have kind of a lead in terms of security and other advanced technologies. If you could provide any qualitative color on growth that you're seeing there. Is it early innings, or are you seeing a lot of growth from security and managed services?

We -- hey, Prab, we don't break out any of our, you know, what I'd call focus areas or architectures. I can't tell you just, as you know, by looking at the market with all the different breaches and everything going on in the market, all the talk about breadth [ph] intelligence both across public and private sectors, if you will, in terms of trying to take that information and use it to protect against the bad guys, if you will. You know, there is obviously a growing market. And I can tell you that it's a market we're focused on. We're adding headcount and resources in that space, and we would expect those numbers to continue to grow for us in the security space going forward.

Thanks for taking my questions, and good luck.

Thanks, Prab.

Thank you. Our next question comes from the line of Bhavan Suri with William Blair. Your line is open.

Hey guys. Hey guys, can you hear me okay?

Yes, Bhavan, we can hear you.

Thanks. Just to turn to first question, sort of -- you haven't had that sort of growth, when I look at the revenue growth, for a while now, and obviously there are some storage guys building some pressure [ph] and things like that. Was there any deal slippage? Was there that might have come in that got pushed out? Was there just sort of a buying pattern that you might have seen in a specific vertical that was different? Do you feel it's more on your side in terms of the sales execution side, Mark? How should we think about that? Because overall your growth was fine, but sort of that quarterly number was just a little lighter than we've seen in the past.

Yeah. Hey, Bhavan. So, one, you have the year-over-year multiple.

Yeah.

I think what you're seeing also, as you know, like in the e-rate [ph] space for example, with a lot of the schools that are out there, over the last few years you've had zero dollars as it relates to e-rate [ph]. That's now opened up. We actually feel like we're very well-positioned based on the schools that selected us with e-rate. So we've got, you know, which is all public. We've got a significant share of that business. So we would expect our select business, which is our strongest business overall, to continue to grow. I think you've got some of the legacy storage vendors, that might hit some tailwinds. I mean I think you've seen with NetApp and HP and EMC with their, you know, with some of the things that they announced, that you probably got some customers out there that are evaluating whether to look at some of the new flash and hyper-converged players out there. But once again, in terms of our forecast and our optimism, we still feel pretty good about where we're positioned both with the legacy and the emerging vendors.

Okay.

Bhavan, I think also to add to that, our fourth quarter is generally a softer quarter for us. There's no --

Yes.

-- what we call events that occur in the quarter, like a manufacture yearend or a budget yearend that occurs. We do have a very good comparable year last year in that quarter that took us in with -- as a comp, we knew that kind of going into this quarter. Mark mentioned also weather which I think did have a small effect on some of our services revenue that did occur. So, the combination of things. But also to look at the gross sales portion, I mean we could go up 4.9% in terms of gross sales, and we did have a larger portion this quarter of maintenance sales than we normally have in this quarter. So I think it was 23% we reclassified as net sales, which is a larger percentage. Normally that percentage is in that 18% to 19% range. So when you're looking at that reclassification, that is a larger percentage than normal for us in this particular quarter. It's just unusual.

Yeah. I mean it's a one quarter but it was interesting. I was just looking back and obviously your Q4 is past the December quarter, so, certainly seasonality and budgets doesn't play into your hands. Okay. Can we talk a little bit about, you know, and I know there'd been plenty of questions about services and everything else, but when you look at sort of visibility at a high level given sort of you got recurring, you got some of the contractual stuff, you've got managed services, how is your visibility as we look out to fiscal 2016, especially given services are becoming a bigger part of the business?

So you're asking, do we have the visibility or are you asking for the exact numbers and percentages here, Bhavan?

What's the relative percentage in terms of visibility? If you look at your internal plans and you look at what your, you know, agai you're not giving guidance, but as you look at your internal plans for fiscal 2016, what sort of visibility you have into that number today? And again, we don't need another plan, just a sense of how visible things are. Because obviously there's parts of the business like customers will come in and buy trunks of hardware or, you know, super-pause [ph] or whatever they're going to do, but some that's not visible.

Yeah. No, Bhavan, we actually have very good visibility into our services numbers going forward, and that includes everything from what we call backlog. That includes the what I call the managed services or annuity business, as well as the pipeline for what I call our transactional professional services. So that's kind of your installation implementation of a solution, if you will, was kind of the transactional, your annuities, your managed services, and some of the other offerings in that space. And then you have what you call backlog, meaning services that you've already booked but you have to fulfill. So we have very good visibility into all three of those. We track them religiously and feel very good about where we are and where we think we're going in that space. That's why we're continuing, you know, I try to give you as much as I can here, since we don't break out services. We continue to invest in headcount in the services space and we continue to invest in our services offerings. So from that end, that should give you an indicator of what we, as we move up the stack, if you will, of our gross margin percentages and the value that we provide to our customer, they're looking for that assessment leg [ph], consultative sale, to kind of help them in the environments that they're looking for, in the areas that are hot in the market today.

Yeah. No that's helpful. And just keeping in line with that gross margin, you've shown nice improvement here, but how should we think about the metric long term, A, as services, managed services, the whole consultative approach, all of it becomes a bigger part of the business? Is there any sort of even medium to long-term targets you guys could share on the gross margin line of where you think things might happen? Again not putting necessarily a fixed timeframe to it, but a sense of where those might go. Well, here's the hard thing, without the forward-looking piece there, Bhavan, is the easy thing is, if you look at it, I think we have a track record. So historically if you look at the numbers and look at the track record for margin expansion, and we believe we're well-positioned in this space going forward.

You're not going to give me anything, all right. All right, let's talk about getting a little more fundamental for a second. When you look at some of the emerging areas, are there areas that customers are asking for, whether it's in software-defined networking or software-defined storage, that either require additional investment or you might try and develop that, you know, buy someone - develop that expertise via acquisition?

Well, acquisition is always part of our strategy. So, part of our, you know, one of our corporate objectives is to continue to build out our national footprint, and that's both organically, which you heard with the 6.5% headcount that we added, as well as acquisition which you heard with Evolve that gives us a greater SLED presence in the West Coast, gives us contracts that we can now leverage. And now the Evolve team is able to leverage the size and scale of ePlus. The good news is a lot of the areas that are coming up, the hyper-converged and some of the storage plays that out there, meaning your flash and object storage and things like that, is we've already got the technical talent in that space. So there's not a major reinvestment in terms of headcount. I think the biggest thing that most companies struggle with, including ePlus, is getting the right number of headcount to attract as many customers as you can. But the good news is, as it relates to a lot of the new technologies coming onboard, we've already built out our emerging technologies team. I mentioned we built out our national presales team that kind of supports some of those activities. And we continue to invest in what I call presales and post-sales engineers to be proficient in those areas. So a lot of them fit. The hyper-converged is really just a play on converged infrastructure, right? So we own no big investment there. In fact, our biggest thing, Bhavan, is, you know, based on what we've accomplished, a lot of the emerging vendors are obviously looking for us to take their technology or solutions to market, and you can only be so many things to so many people. So that's why we've created the emerging technologies and solutions go-to market themes to help us step through and look at the technologies that sit within the core focus areas that we sell and how it's complementary to what we're doing, and to keep training [ph] to a minimum where we can.

Yeah. It's always a challenge with new ones which one to invest in and which one not to. And then one last one from me, just of the new sort of wins or even expansions at existing customers in terms of projects or deals, how many would you say were involved bundled, so, sort of, you know, managed services in the financing or financing, you know, because obviously the sales guys are incented through gross margin dollars, it'd just be interesting to know how many of those sort of involve multiple products or multiple bundles of the various offerings.

Well, here's the thing. The two that I highlighted were both bundles of services into our product, so, multiple security vendors in the education institution that I talked about, that was the large $4 million plus that they have a large security budget that we think we'll continue to go back to the well on, if you will. And the other was a combination of managed services, our enhanced maintenance support staffing website. If you think about that, Bhavan, where we believe that's a good news is, we built up our services capabilities to go back to our, you know, approximately 3,000 customers to provide these add-on services. So that's where we've sold the products. We're now trying to go back and say, hey, you're doing the maintenance renewal, we could provide level one support and services around NetApp and Cisco to start, we have managed service capabilities across your networking, security storage, server, kind of compute plays. And then we have the ability to provide staffing or bodies to help you, as you roll out these technologies. So it's a good way to go back to customers. The security stuff, what's really interesting is, obviously, it's top of mind with every, you know, management team at every company, it's top of mind at every Board with cybersecurity. So it's easy to get a meeting if you have the capabilities to talk about your security capabilities and how you can help that customer ensure that the data is protected. And if you think about the cloud which I think you know, Bhavan, is you got more and more people moving towards the SaaS or cloud offerings, and you got to worry about encrypting that data as it's leaving the network to go out to the cloud and vice versa, so there's security opportunities within things we've already sold to our existing customer base.

That's helpful, Mark. Thanks guys. Thanks for taking my questions.

Thanks, Bhavan. See you soon.

Thank you. I would now like to turn the call back over to management for any further remarks.

Thank you, Abigail [ph], and thank you all for participating in today's call. We look forward to seeing you at upcoming conferences and updating you for our first quarter results. Thank you.