Good day, ladies and gentlemen. Welcome to the ePlus Earnings Results Conference Call. As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference, Mr. Kley Parkhurst, SVP. Sir, you may begin.

Thank you for joining us today. On the call is Mark Marron, CEO and President; Elaine Marion, Chief Financial Officer; and Erica Stoecker, General Counsel. I want to take a moment to remind you that the statements we 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 Form 10-K for the year ended March 31, 2017, and our Form 10-Q for the quarter ended September 30, 2017, 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 the non-GAAP financial measures, and we have posted a GAAP financial reconciliation on the shareholder information section of our website at www.eplus.com. Reclassifications of prior period amounts related to numbers of shares and per share amounts have been made to conform to the current period presentation due to the March 31, 2017 stock split. The effect of the stock split was recognized retroactively in the stockholders equity and in all share data. The financial statements include the effect of the stock split on the per share amounts and weighted average common shares outstanding for each of the 3-month periods ending September 30, 2017 and 2016. I'd now like to turn the call over to Mark Marron. Mark?

Thanks, Kley, and thank you for participating in today's call to discuss our second quarter 2018 results. This was a quarter of solid performance across key profitability metrics. Consolidated gross profit grew 6.9% to $87.6 million and gross margin increased 150 basis points to 23.6%. Following the strong 23% sales growth that we achieved in the first quarter of this year, our second quarter sales were flat as compared to the year-ago period, in part because the current quarter reflected a higher proportion of sales that were reported on a net basis, while adjusted gross billings of products and services increased 3.3% for the quarter. We continue to benefit from our investments in the high-growth areas of security, cloud, and digital infrastructure. We are pleased to report that security products and services represented 17.5% of adjusted gross billings in the second quarter. And this metric increased 170 basis points year-on-year and 40 basis points sequentially. In the first half of 2018, adjusted gross billings of security products and services grew 30%, compared to the first half of 2017, as security continues to be top of mind for our customers. Another high point of the quarter and last 6 months is our progress in growing services as measured by revenue growth, expanded offerings and human capital. Our OneCloud acquisition completed in May, significantly expanded our cloud service and trainings offerings by moving us to the forefront of IT automation and orchestration, DevOps, OpenStack and other related technologies. We're continuing to train and expand our sales and engineering teams in these new disciplines and utilizing OneCloud's highly trained technology consultants, architects, developers and trainers to deliver the ePlus OneCloud value proposition to our customers. We believe that OneCloud's unique skill sets will also help increase sales of traditional ePlus products and services,…

Thank you, Mark, and thank you, everyone, for joining the call. We are pleased with the gross margin and gross profit improvement we experienced in the second quarter. Our year-to-date results, double-digit growth across the board, showed the benefits of our investments in high-growth areas and position us to grow ahead of the overall IT spending for fiscal year 2018. Let's start with our consolidated quarterly overview. In the second quarter of fiscal 2018, our consolidated revenues were essentially flat at $370.8 million when compared to last year's second quarter growth in net sales of 10.5%. Our adjusted gross billings of products and services grew 3.3%. This quarter, the adjustment from adjusted gross billings to net sales of product and services was 29% as compared to the prior year of 26%, reflecting a higher proportion of sales of third-party software assurance, maintenance and services. We've built a team which specializes in these services and find that customers value, the transparency and efficiency we bring to the process of making sure their technology investments continue to be covered without lapse by manufacturer support agreements. Gross profit was up 6.9% to $87.6 million, and our gross margin widened 150 basis points year-over-year to 23.6%. The improvement in gross margin was driven by an increased mix of products and services, which are accounted for in the net basis, as well as higher service revenues. Our operating expenses increased 9.3% to $58.7 million. The majority of this increase reflects higher salaries and benefits due to increase in personnel. Our total headcount grew by 17% to 1,282 from 1,096 a year ago with the majority from acquisitions and primarily for customer-facing positions, including 162 sales and engineering personnel. The increase in salaries and benefits was also attributable to higher health care costs. Operating income of…

Thanks, Elaine. We are pleased with the year-to-date net sales growth of 10.2% and gross margin of 22.4%. We believe that as we continue to move towards being a higher-end IT provider, focusing on products and the consultative and annuity services our customers need around security, cloud and digital infrastructure positions us well to profitably capture market share in the faster growing segments of the IT market. We have an established and growing base of over 3,200 enterprise and mid-market customers across multiple industry, who rely on us to deliver the outcomes they need to achieve their business goals. Operator, I would now like to open the call for questions.

[Operator Instructions] Our first question comes from Anil Doradla with William Blair.

So Mark, on the technology sales front, you know the flattish revenues, you did provide a little bit of color, but just revisiting it again, is it fair to say some of those revenues were pulled in the previous quarter? Is that what really happened? Or was there something else?

Yes, well, so there's a couple of things that I think happened in terms of sales. One, we had a very large gross to net adjustment that Elaine noted on the call. As we've talked about in all of our calls, we also have our land and expand program, where we did have a large project that wound down, if you will. But the thing that we always talk about, it's cyclical, it's opportunistic, it's lumpy in nature but we do believe we will have other opportunities as we go forward. So I would take a look at our numbers on the first half or trailing 12 months to get a better feel of where we think we are.

And going forward, this netting effect on some of these revenues, is that -- is this going to be something that we'll see more often? Or is this something more like a seasonal one-off thing now and then?

Well, I don't know if I can call it a seasonal one-off thing. We've seen it for a while in terms of the gross to net. Now some of this is by design, Anil. So we've got teams that focus on doing these types of renewals with our customers. But more importantly, upgrading them to some of our enhanced maintenance service programs as well as managed service programs. So what happens in a lot of cases with these customers, we lock them in for 3 years and then we have a recurring revenue and increased margins as we go forward as well. So it depends on the customer and depends on the deal.

Mark, I wasn't sure whether you guys talked about the contribution of security applications in your revenue? Did you point that out?

Yes, we did, Anil. We actually -- if I look at the quarter, if I were going to give you snapshot. One of the strong points was our security. In terms of our security, adjusted gross billings for security products and services was 17.5%. That's up 170 basis points year-on-year, and we're actually up 30% for the first half of this year versus last year in security.

And Elaine, on the financing revenues, I mean, nice bump there. Again, we always see these perturbations and movements on this front. But again, can you again remind us what your strategy is on this financing revenue component line? Is this something that you guys are emphasizing? Or the pop that we just saw, is this one-off quarter? We should not be expecting -- this is not a new norm, any color on that front?

Sure, Anil. The financing segment this quarter benefited from some early termination of leases. So essentially, we're -- we negotiated the back end of the residual value disposition of certain leases that early terminated in the quarter. So we're eliminating the potential for that profitability down the road at the end of the term. But it did get negotiated in this particular quarter per the customer's request.

Going forward, can we see more of these? Or this is, again, a one-off thing?

Well, we always have fluctuating earnings in this particular segment, whether it's related to transactional gains where we would sell the lease stream or whether it's related to some sort of event that occurs at the termination of the lease, whether it's a buyout, could be an early buyout, or an early termination. So those are really customer specific, and term specific relating to the financing transaction, in particular.

Our next question comes from Matt Sheerin with Stifel.

Just a couple of questions from me. On the revenue growth and then, maybe on the gross billings. What was the organic number if you exclude the acquisitions that you've done in the last year?

Do you know what they are?

For the first half, it's roughly 50% organic and 50% acquisition.

Here you go.

In terms of growth, okay. And in the quarter? For the quarter, do you have the number?

Yes, I don't have the quarterly number, Matt.

Okay. And then I'm just looking, I mean, you talked about the netted down effect impacting the revenue growth. But if you look at the gross profit dollars in the technology segment, they were up just 3% year-over-year. And that looks like the lowest number in terms of percentage growth in gross profit dollars in several quarters. And I'm just trying to figure out how much of that is a function of seasonality or perhaps that one big program that's winding down and having a negative impact on that.

Well, let me try and take a shot at it Matt, I'll touch on a couple of different things and then maybe it'll will answer what you're looking for. So if we look at the quarter, I don't think we're satisfied with our quarter. But we really executed well on a lot of the probability metrics. So our gross margins were up 150 basis points, our gross profit was up 6.9%. We had a strong quarter for our security as well as services, which I noted earlier on the -- for Anil. And we kind of executed on a lot of our M&A plans in terms of really building out our solutions and portfolio. The gross to net had a big effect. This was one of our larger gross to net. So that definitely had a factor on the net to sale, our sales. The other thing I'd ask you to just kind of keep in mind a little bit is remember in Q1, we had a 23% growth in Q1. So when we look at the first half, we're actually very pleased with where we are through the first half. So we've got a double-digit growth in net sales as well as net earnings. And then when I look at it, we've continued to invest in headcount. So Elaine noted we've added a 186 heads, of which 85% are in the customer-facing sales and services. So to give you a feel, in March of this fiscal year -- I'm sorry, March of 2017, we had 400 systems engineers. As of the end of September, we've got 467 SEs. So we continue to kind of invest in the engineering talent we need to be competitive in today's market.

Yes, Matt, just to add to that, we -- our gross margin on product and services increased from 21.2% to 20 -- to 21.2% from 20.2%. That's 100 basis points. So the GP growth was 3.1% on basically flat sales. So I would say that we executed pretty well in driving more profitability this quarter in the tech segment, in particular.

Okay. And that 10% customer that you had in the last fiscal year, you talked about the winding down of that program. Is that pretty much complete at this point?

I would say that project is towards the end for sure. But that's a customer that we continue to work with on multiple projects. So as it relates to the big project we've mentioned in prior quarters, yes, it's towards the end of that project life cycle, Matt.

Okay. And I appreciate that you don't give a forward guidance. But if you look at the last 3 or 4 years typically in the December quarter, your technology segment is down in the 10% plus range sequentially, and I know that it's seasonal. And obviously, the business is changing somewhat. You've got acquisitions, et cetera. Anything you can help us there in terms of directionally in December quarter?

Yes, let me -- maybe a few things and I'll see if I could give it -- where -- it's always tough with the forward-looking, Matt. So in terms of customer demand, in terms of pipelines, in terms of forecast there, nothing has changed in terms of downward trends or anything like that. We're continuing to expand some of our offerings and capabilities. I talked about a few deals in my earlier notes, if you will, and those were opportunities that a year or 2 ago we wouldn't have had. So there are new income streams for us as we go forward. The other thing that I'd highlight that we didn't talk about in the release or during our notes that we went through. If you look at our number sequentially, so at a -- on a consolidated basis, if you look at our operating income sequentially from Q1 to Q2, our operating income was actually up $7.5 million. So that may give you a feel of some of the things that are happening within the business.

From Q1 to Q2?

Yes, sequentially.

I'm not sure what that has to do with the December quarter.

Well, it gives you a trend from Q1 to Q2 is what I was trying to give you, since I can't give you -- we don't give forward guidance on December. So here's what I'd always tell you about this quarter. There's always a lot of the year-end spend. That's always out there, that come in. Those deals are tough to forecast and predict. But what I was trying to tell you earlier is the customer demand is still there, the pipeline is there and our management team is very confident, comfortable in their forecast.

Okay. You are going to have tough comps, so obviously, all for that one program, that's rolling off right?

Well, you always have tough comps. But what I'd mentioned to Anil is, I would always look at it, whether you at our first half or you look at our trailing 12 months, that gives you a true feel of what's happening within our business. You're always going to have large deals or opportunities that kind of come in and out. We're opportunistic. They're cyclical. A lot of times we'll -- like we talk about with the land and expand, we'll get the foot in the door and then grow the profitability over time. And so they yield great opportunities and they normally pop in from time to time. So it's tough to kind of give you an exact answer there.

Okay. And the SG&A percentage was up and the OpEx was up for reasons you stated in terms of the investments. And as we think about the December quarter, is that sort of a flattish number to think about? I know a part of that OpEx cost is variable expenses tied to the sales and commissions. But I would imagine, it will be a flat at best, right?

In terms of the SG&A, we did have some specific expenses, obviously related to the acquisitions this quarter as well as some specific expenses related to the quarter itself, which are marketing expenses and some contingent consideration adjustments that will replicate in the following quarter. We're not unpleased with the SG&A. We added, like Mark said, 186 heads year-over-year. We picked up several new offices with the OneCloud acquisition as well as the IDS acquisition. So those expenses will roll through as well.

Okay. And just following up the earlier question on the financing segment, which is very lumpy and without that extra $3 million or so incremental revenue from that -- or the gross profit from that acquisition year, the results would have been down year-over-year. So definitely helped you. Do you have any -- in terms of the events that happened last quarter, did you have any visibility going into the quarter that, that would play out like that?

Well, I think we -- we were having conversations with our customers but in terms of an early termination, that's something that's brought about by the client. So whether it occurs or doesn't occur and they contact us 6 months in advance or 3 months in advance, sometimes we do and sometimes we do not have visibility to that.

Thank you for participating in today's question-and-answer session. I would now like to turn the call back over to Mr. Mark Marron for any closing remarks.

Okay. Thanks, operator. So if I could first off, I'd like to wish everyone a happy and healthy holiday season. We look forward to speaking with you come February. And I want to thank you for joining us on today's call. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude the program. You may all disconnect, and have a wonderful day.