Good day, ladies and gentlemen, and 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 call, 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, 2019, and our Form 10-Q for the quarter ended June 30, 2019, 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've included a GAAP financial reconciliation in our earnings release, which is posted on the Investor Information section of our website at www.eplus.com. I'd now like to turn the call over to Mark Marron. Mark?

Thank you, Kley. And thank you, everyone, for participating in today's call to discuss our first quarter results. Our first quarter results demonstrate strong demand for our technology product solutions and services, and we're off to a strong start in our fiscal 2020. In the quarter, adjusted gross billings were up 13.7% year-over-year, and gross profit grew an impressive 14.8%. Consolidated gross margin was up 170 basis points to 24.3%, remaining at an industry-leading level, supported by both our technology and financing segments. We continue to view gross profit growth as an important measurement of our performance, and we think this is a good indicator for investors to benchmark our progress. The percentage of our sales that we've recognized on a net basis increased again this quarter, reflective of our success in selling third-party maintenance services and software subscriptions. As I have mentioned in previous calls, although, the evolving business model towards subscription and ratable services initially pressures top line comparisons and operating expense ratios, it is additive to gross profit and it should enhance the quality and predictability of our earnings overtime. As the industry continues to evolve towards a model where revenues are being recognized over time or on a net basis, we're well positioned to capture these annuity-type revenues with specialized go-to-market and operational teams. Also, we have built data analytics capabilities to ensure that we are both capturing new opportunities as well as meeting customer needs. What is not changing is our focus on high-growth areas of security, cloud and digital infrastructure. Within these broad focus areas, our end-to-end solutions lead with consultative and advisory work and continue with optimized services, such as managed services, enabling us to be a full service provider to our customers and grow with them from a valuation and analysis to…

Thank you, Mark, and thank you, everyone, for joining us today. Starting with our overall financial performance in the first quarter of fiscal 2020. Net sales were $381.4 million, up 7% from the prior year. Net sales in the technology segment increased 6.2% year-over-year, driven by higher product sales and a 35.8% increase in sales of services. Also contributing to the top line growth was our financing segment, where net sales increased 32.8% to $12.8 million. Looking at our end markets in our technology segment on a trailing 12-month basis, technology and SLED continue to be our largest customer end markets, accounting for 21% and 17% of technology segment net sales, respectively. Financial services and healthcare, each accounted for 15%. Telecom, media and entertainment represent approximately 14% of net sales, and the remaining 18% from several other client types. Adjusted gross billings in the technology segment amounted to $548.4 million, a 13.7% increase compared to $482.3 million in the same period a year ago, reflecting strong demand as well as a higher gross-to-net adjustment between billings and sales. Additionally, security grew 54.9%, supporting this strong performance. The adjustment from adjusted gross billings to net sales represented 32.8% in the first quarter of fiscal 2020, a 470 basis point increase from the year ago quarter, reflecting a higher proportion of sales of third-party subscription-based software and maintenance. Consolidated gross profit increased 14.8% to $92.6 million from $80.7 million. Our consolidated gross margin expanded 170 basis points to 24.3% for the quarter. Gross profit for the technology segment increased 12.4% to $81.8 million, while gross margin expanded by 120 basis points to 22.2% due to a favorable mix of products and services. Service gross margin declined to 37.4%. The decline was related to a larger proportion of staffing services and enhanced maintenance…

Thanks, Elaine. We were pleased with our first quarter performance. Our business outlook remains positive with strong customer demand. In addition to the growth in recurring revenues, our services backlog remained strong, which should benefit our gross profit profile. ePlus is serving a roster of over 3,400 enterprise and middle market customers, giving us tremendous opportunities to cross-sell our increasingly broad suite of products and services. Our strong balance sheet provides us the resources to maintain a balanced capital allocation strategy that includes investment in organic initiatives, share repurchases and acquisitions, and we continue to evaluate acquisition candidates with the right geographic profile that can enhance our product and service offerings. Operator, I would now like to open the call for questions.

[Operator instructions] Our first question comes from Maggie Nolan with William Blair.

This is Ted on for Maggie. So I wanted to ask about the -- some of the subscription and annuity revenue that you've seen this quarter. Do you feel like that's reached a point where it's become less of a headwind? And I know, Mark, you mentioned that it provides some consistency in the revenue stream. So is this the type of quarter that you expect to be able to deliver more consistently, going forward?

As it relates to software subscription -- so one thing, Ted. So for the quarter, our software subscriptions, third-party software subscriptions were actually up about 112% year-over-year. So we've actually built a software practice that actually works with our customers around enterprise agreements and things like that. So I would expect that to continue at least for the near future. And then over time, we'll evaluate to see if it'll level off.

Got you. And so then, based on some of your conversations with customers, what's your sense for how the demand environment today compares to your expectations going into the year? Has your outlook changed at all for products and services.

No, it hasn't changed, Ted. Still feel good about both our pipeline, and our backlog. What we're hearing from our customers, the things that they're looking to purchase to protect themselves, both from a security, moving to the cloud, digitizing their business. So demand and what we're seeing from an IT spend still hasn't changed.

Very good. And then a couple more questions here, if I can, real quick. So I wanted to ask about the large projects. What are you seeing in terms of large project pipeline?

Well, we didn't see any large projects as it relates to this quarter. So if you're talking about our land and expand, didn't have any big land and expand projects this quarter that affected our numbers, if you will. As we talked about, Ted, on previous calls, we're always looking for opportunities with some of the bigger enterprise customers that were now, based on our size and scale and relationships with other customers, were being brought into more and more enterprise-like accounts. So we'll continue to pursue those and leverage our land and expand, and then, over time, try to sell more within that customer base?

Definitely. And last question here, if I can. So I wanted to dig in a little bit on the SLAIT acquisition, how much growth did they contribute to services revenue this quarter? And how much did they provide to products revenue this quarter?

Overall, the -- our organic growth was about two third, and SLAIT was about one third, Ted, for growth for the quarter.

In adjusted gross billing.

In adjusted gross billings, thank you.

Our next question comes from Matt Sheerin with Stifel.

So a question -- just a question regarding the hardware growth that you're seeing, Mark. We're in an environment where we're hearing some certain OEMs seeing enterprise pushouts, particularly weakness in storage and servers. I know you sell a lot of those products in addition to networking products. Could you talk about where the demand is right now, and what priorities on the hardware side you're seeing from customers?

Okay. So on the storage and servers, it's kind of up and down, but I think the demand is still up a little bit that we're seeing on our end. If I look at the uptick, Matt, security is a big uptick. I think it was noted earlier, our security was up almost 55%, I think it was 54.9% year-over-year, which is now about 21% of our adjusted gross billings for the trailing 12 months. We're seeing some networking or net comp spend, if you will, overall. So those would be the areas we're seeing in the upticks, along with some of the services that we're providing to our customers. So as we've noted in prior calls, we've made a lot of investment in our cloud, our security, our services practices, and we're starting to see some of the fruition of that come through.

Yes. And you talked to the previous question about the fact that you're not seeing any like these very big enterprise deals. Is that a timing issue? Or are you also seeing large deals get pushed out for whatever reason, customers being more cautious?

Yes. Sorry, Matt, just some clarity on that one. We didn't have any land-and-expand large projects. If you remember, we had talked about a large project over the last year or two, that kind of had a little bit of a hangover for us on a compare. We're seeing many enterprise deals, both from a hardware as well as from a software perspective, but none were the land-and-expand portion that we had talked about. We are seeing some nice growth in our enterprise base, though. And I think that's part, as we build out our solutions, that enterprise and mid-market customers look for in the cloud and security and digital space, I think, hopefully, that will continue for us as we go forward.

I guess, my question was whether you're seeing any hesitancy from customers in terms of pulling the trigger on projects because of the macro environment, tariffs, et cetera.

Yes. No, we haven't seen anything, Matt. In fact, tariffs haven't affected our business, either positively or negatively. So we haven't had any deals pulled forward or be pushed out. So I'd say that the, at a macro level, it hasn't changed for us. With some of the announcements over the last few days, I mean, we'll have to see how that kind of plays out over coming weeks, but haven't heard anything so far from customers in Q1, or so far from our teams as it relates to Q2 as we move through our second quarter here.

Okay. And just back to the numbers you gave around security and solutions at, I think, 21% of billings, and then also the services number. Could you give that services number again and break that down to the various components of the services that you do?

Yes. Well, Matt, as you know, we don't break it down. But if you look at our services, a couple of different things. At the end of March, at the end of our Q4, we had talked about our services. We had a CAGR of 24% over the prior 3 years. This quarter, what we had talked about was our growth was almost 35% year-over-year for our services. So we feel really good. A lot of things that we've talked about in terms of investing and building out our consultative capability, service capabilities, building out our managed or annuity services capabilities, our enhanced maintenance services capabilities is actually working as well as building out our staffing capabilities. So in fact, we were, I'll say, pleasantly surprised. Our staffing numbers were up nicely, which actually affected our services margins a little, because it's a little bit lower margins than our professional services and consulting services. But it was a positive year-on-year in terms of our service revenues and our services GP overall.

Okay, fair enough. Just trying to figure out what percentage of your services are selling third-party services and warranties versus your own feet on street, feet on the street, where you're actually working with customers directly as opposed to selling third-party warranties and services and annuities.

Yes. Matt, when we're talking about our revenues in terms of our services revenues, I think we said it was 12% of our net sales for this quarter. That's all our services. So that's not third-party maintenance. When you get into the third-party maintenance, let's say, Cisco, SmartNet and stuff like that, is when we talk the gross-to-net, which our gross-to-net was up roughly 470 basis points. So that's the third-party maintenance, along with subscription sales that falls in that gross-to-net bucket.

Does that fall on the software bucket, then? What bucket, if it's not in services, where is it?

Matt, that's in our products, sales of products line on our income statement. Sales of services line on the income statement in solely services that we provide directly to our clients.

Our next question comes from Greg Burns with Sidoti.

When we look at the expansion of the gross margin year-over-year, what percent of that was driven by the change in gross-to-net versus maybe the growth in services?

Yes. The majority of the increase in the gross margin is from the gross-to-net, but also contributing to, was the increase in gross profit from our services, it's obviously a smaller component of the entire net sales line. So if the majority of it was the net sales component, yes. Also contributing was our financing segment they had a large increase in gross profit as well from a year-over-year basis.

Okay. And when we look at some of the growth areas you've been investing in, certainly, securities showing nice growth. But you also talk about cloud and digital infrastructure, your practices, your cloud and digital infrastructure practices, how do they compare in relation to your security practice, maybe from a maturity perspective? I'm just trying to get a feel for whether there's room for improvement in other areas of growth where you can invest more and kind of maybe see the type of growth you're seeing in security and some other areas of the market?

Yes. So we just -- right now, we're just, Greg, just breaking out the security. But when you think about cloud, it's effectively a datacenter business, which is what we grew up on as ePlus. So we're a datacenter company, providing all your compute, your storage or networking, and it's just a continued play on that. So all the things that are coming out around digitization of networks and software-defined and mobility and everything that goes with it fits within our sweet spot. So that's all things that we've kind of grown up with, and we continue to enhance and expand as we move forward.

Okay. So I guess, in terms of more growth areas of the market, I mean, do you still perceive security kind of leading in terms of growth, in terms of the services you're selling? Or are there other areas that you see maybe potentially being comparable to or additive in a similar fashion that security has been.

Well, the reason we always break out security, Greg, is one thing. No matter -- if you think about it, even if you put applications out in the cloud and you have some that are on-prem, you still need security from a -- both from a visibility standpoint or from a protection standpoint. So when we say we're building out our cloud, security and digital infrastructures, those 3 are really tied together in many different ways in terms of what we sell, both from a product -- integrated product as well as the services that we provide. So it's really cloud, security and digital infrastructure is where we're seeing -- where we're focusing our sales and services teams, where we're making investments in training and headcount and where we're building out solutions and services that our customers need in those spaces.

And then just lastly. In terms of services and what's included in that line item, I just wanted to understand, some of the consultative services, they're not necessarily recurring, I would say. So is there -- is building off of this first quarter kind of growing from here how to look at it? Or was there anything in this quarter that was particularly strong, where maybe it might not repeat next quarter.

No, I don't think there's anything in terms of that might not repeat. So it's a lot of -- so if I were to step through it, the consultative is where we're working with the customers, helping them, for example on cloud usage and risk workshops, where we'll sit with the customer, we'll actually help them understand where their applications reside, what's the security that they have to put in place and then help them build a road map of what they have to do, both internally and externally, to protect your data, which is a combination of products and services. So those types of things, I would expect to continue, not only in the cloud but also in the security space and digital space. As it relates to PS, that's just the function of the products that we sell from an installation and implementation, and I would expect that to continue. And then as it relates to annuity services, what we've kind of talked about, overtime, what's great about annuity services, both good and bad, is you book a deal of annuity services, you then have that ratable revenue in GP for 36 months or 60 months, depending on how long the term is. So as you build up that backlog in billings, that revenue and GP should grow overtime. The headcount, the piece that we have is you have a little bit of a headwind upfront as you've got to put all the expense in upfront in terms of headcount and tools and processes and things along those lines that affect your numbers, short term.

Our next question comes from Brett Knoblauch from Berenberg Capital.

Just a couple of ones for me, the first of which is just on SLAIT. How is that performing relative to your expectations now that we're a few months in.

Yes. Sorry, Brett, we didn't hear the beginning, but I think the question was around SLAIT and how they're performing. We feel really good about the SLAIT acquisition. A good group of people, that's a real cultural fit, strong management team, really performed up to expectations so far for us, and we're starting to see some real nice synergies across what we bring to the table as ePlus, even though they're now ePlus and what SLAIT brings to the table, whether with their helpdesk services, governance risk and compliance type services in the security space, staffing and a few other things. So right now, very, very pleased with the SLAIT acquisition.

Okay. Then speaking of synergies, how should we be looking at SG&A, going forward? I think this is the 6th or 7th quarter where we saw a year-over-year increase in just your SG&A spend. Is that something we should kind of forecast going forward?

Yes, look, if I look at it now, I would think this quarter is a good run rate for SG&A for us, and that precludes, if anything exceptional happens or anything along those lines. The other thing that I just can't predict at this point, if GP, gross profit, is up significantly, then the variable comp would be up. But I think this quarter is a good run rate to go off of from an SG&A perspective.

Okay. And then just one more on services. How should we think about that sequentially? Should that -- seen as sequential increases or incremental increases, sequentially?

No, I don't think so. Services, I'd have to look at the numbers, so I don't want to just make it up, but I don't think you'll see sequential growth each quarter. Now we would expect, with annuity over time, we'll start to see consistent growth there. But we've seen our services kind of go up and down based on the quarter, meaning, whether it's the end of year, we get a bump from an acquisition like SLAIT or things along those lines that could affect that.

And then how much of that 35% securities growth was driven by SLAIT being included?

How much of the -- well, no, the 35 -- the one third that I talked about -- so two third was organic growth and one third was SLAIT for adjusted gross billings. And then...

But yes, basically, you know how they are down to like the actual services segment. How much of that services growth -- year-over-year growth was contributable or attributable...

I would say, a nice portion. In terms of their staffing and a few other businesses that they built up, was a nice portion of the services.

And I'm not showing any further questions. I'd like to turn the call back over to our host.

All right. Thank you. Thank you, everyone, for joining us today. We were pleased with our performance for the quarter and look forward to seeing you or hearing from you at the next quarter's call. Take care. Have a good day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.