Good day, ladies and gentlemen. Welcome to the ePlus Earnings Results Conference Call. As a reminder, this conference 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 maybe 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 September 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 have 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 would 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 second quarter results. Our performance in the second quarter were strong as we achieved double-digit growth across key metrics, benefiting from solid demand from our customers and execution by our sales, engineering and support teams. This performance came on the heels of a strong Q1 and demonstrates that our strategy of focusing on the higher growth IT solutions areas that we have identified and prioritized is compelling. We believe that our quarterly and year-to-date results support the investments we have made in people, technology and service offerings to drive long-term growth, which Elaine will go over in more detail in her remarks. Our marketplace is dynamic and fast-paced, and ePlus has been committed to staying ahead of the curve. This means anticipating and preparing for industry shifts like the migration from one-off transactions to subscription sales and increasing customer needs for Lifecycle Services. Today, ePlus has the capabilities to provide our customers with end-to-end solutions from assessments through long-term support, along with flexible consumption and financing models. This positioning has enabled ePlus to grow our gross profit, show strong gross margin growth and build share with existing and new customers. It also clearly shows the advantage we have by leveraging both our technology and finance segments to create full solutions with creative and flexible payment options. This allows us to provide clients with the solutions they need to run their business today, while finding creative ways to reduce their overall spend. In the second quarter, adjusted gross billings increased 19.2%, primarily driven by organic growth and reflecting our ability to deliver complex solutions around our key focus areas of cloud, security and digital infrastructure to our mid-market and enterprise clients. Net sales growth of 19.3%…

Thank you, Mark and thank you everyone for joining us today. We are very pleased with our fiscal 2020 second quarter results. Net sales were $411.6 million, an increase of 19.3% from the prior year second quarter. Net sales in the technology segment increased 18.8% year-over-year to $397.7 million, reflecting a 16.9% growth in product sales and a 35.1% increase in service revenue. The increase in sales was derived from customers in the technology SLED health care and Telecom, Media & Entertainment industries. The increase in services revenue was across the board in professional services, managed services and staff augmentation. Revenue from the financing segment of $13.8 million, increased 34.8% year-over-year, mainly due to gain from several large transactions. Results from our financing segment tend to be uneven from period to period. Looking at our end markets in the technology segment on a trailing 12-month basis, technology and SLED continue to be our largest customer end markets, accounting for 22% and 17%, respectively, followed by Telecom, Media & Entertainment was 16% and healthcare and financial services accounting for 15% and 14%, respectively. The remaining 16% were distributed among several other client types. Adjusted gross billings in the technology segment of $579.1 million increased 19.2% compared to $485.9 million in the same period a year ago, mainly driven by strong demand from larger customers as well as some contribution from our recent acquisitions, SLAIT and ABS Technology. The adjustment from adjusted gross billings to net sales was 31.3% in the second quarter of fiscal 2020, a 20 basis point increase from a year ago quarter, reflecting a higher proportion of sales of third-party subscription-based software and maintenance. Consolidated gross profit increased 20.5% to $103 million from $85.5 million in prior year. Consolidated gross margin of 25% expanded 20 basis points versus…

Thanks, Elaine. Our year-to-date results have positioned ePlus for continued growth in fiscal 2020. We continue to see strong demand for our differentiated solutions across our expanding roster of middle market and enterprise customers. Thanks to our ongoing investments in talent and technology, we were able to customize solutions that are enabling our customers to meet their business needs, whether this means driving their cloud strategies, implementing their cybersecurity programs or supporting their digital business initiatives or a combination of all three. At the same time, we are staffed to provide the lifecycle of their services requirements from advisory and consultative to staffing and all the way to managing their IT infrastructure. These Lifecycle Services resonate especially well with our middle market customers, who are able to outsource a large portion of their IT requirements to ePlus. Our position with both enterprise and mid-market customers gives us confidence in our long-term outlook and in our ability to continue to upsell existing customers and gain new ones. In addition, we will continue to look for ways to expand our reach and footprint, both organically and through acquisitions that enhance and expand the solutions and services we provide and grow our customer base. Operator, I would now like to open the call for questions.

[Operator Instructions] Your first question comes from Maggie Nolan from William Blair. Your line is open please go ahead.

Hi, Mark and Elaine. I am wondering if you can give us a little more granularity on the strengths in the quarter. Was there new logo additions, existing customers, particular vertical of strength, just something to help us understand what really drove this?

Okay, hey Maggie. How are you? So first off, it was a strong quarter for ePlus across a lot of different areas. As noted in the press release and on the call, both our adjusted gross billings, our net sales, our gross profit and operating income will increase nicely. The areas that I think affected that, services was up again 35% this quarter, similar to Q1. We had another strong quarter with our financing team, and we’re continuing to find ways to leverage the capabilities and the relationships between our financing teams and technology teams to drive incremental revenue. We saw a nice growth. There were nice metrics across all of our top 5 verticals, not only for the quarter, but year-to-date as well as the trailing 12 months, we’ve seen growth in those top 5 verticals. We also saw a nice uptick with some of our enterprise customers based on some of the land and expand program that we’ve talked about previously.

So is it fair to characterize as more broad-based. And if so, does that mean there was particularly positive environment this quarter or is there something that was driving the more broad-based positive environment?

Yes. I think there were a few things. One, I think it was a positive market for us. Enterprise, we saw a nice uptick in our enterprise. But I will note, from 100 employees all the way up to enterprise customers, we saw growth. We had one segment that was actually down, but I never worry about the segment’s quarter, quarter is no trend. But we saw some nice growth with our enterprise customers, but also across our mid-market as well in certain areas. But the key thing, Maggie, too is the verticals. Across both telecom technology, finance, healthcare and SLED, we saw growth year-over-year first half as well and then the trailing 12 months. So we are seeing it across all the verticals right now.

And then in terms of the type of revenue we are seeing in here, would you characterize a lot of this as kind of those one-off transactions or subscription revenue and kind of how can we think about the sustainability of some of the projects that we’re hitting this quarter?

Okay. So that’s a tough one overall, Maggie. As we always talk about. We’ve got the gross-to-net factor. This was kind of first quarter, that it seemed to flatten out a little, and I don’t know if that’s a trend yet. We’re still seeing a lot of subscription deals. So our – I think we noted the security trailing 12 months were up 110 basis points. So a lot of that is subscription-related. There’s also some other solutions we sell that are subscription-related. But we did see for – one of the first times in a long time that gross-to-net actually kind of flattened out. So I don’t know if that’s a trend yet or that just was a quarterly thing. We did have a strong services quarter again, which is up 35% year-over-year. So there were more than a few things that kind of affected that.

Okay. Thanks Mark. And then Elaine, can you help us understand how much in the quarter of both rev growth and adjusted gross billings growth was inorganic? That’s all for me. Thanks guys.

About 75% was organic in adjusted gross billing, yes.

It was a strong quarter, Maggie, for organic. And what we are seeing is with some of the acquisitions, we’re picking up some nice customers that we’re going to be able to go back and into sell to as well as some really nice service offerings that we’re going to be able to leverage over time. But as Elaine noted, about three-fourth of our adjusted gross billings was organic, which was a nice quarter for us.

Great. Congratulations guys.

Alright. Thanks Maggie. We will see you soon.

Your next question comes from Greg Burns from Sidoti & Company. Your line is open. Please go ahead.

Good afternoon. So I just wanted to touch again on that dynamic between revenue and adjusted gross billings. More recently, we’ve seen adjusted gross billings outpacing revenue. So did you see a shift in the mix where you had higher percentage of product sales as opposed to maybe maintenance and software-type sales? Was there a shift in mix this quarter that drove that dynamic?

Yes. I don’t think it was a shift in mix. It was a 20 basis point difference quarter-over-quarter. But on a 6-month basis, we are still up. We’re at 32%, was reclassed versus last year at 29.6%. So I think it’s a quarter-over-quarter comparison. Like Mark said, that kind of flattened out for us. But the mix didn’t really change in terms of what’s recognized growth and what was recognized in that.

Okay. And some really nice operating leverage this quarter, how should we think about this going forward? Is the current level of OpEx kind of a good run rate, just how should we think about the amount of leverage to expect?

Yes. Hey, Greg. Good question. I think, yes, this quarter is probably a good metric. The thing I just want to note, realize the variable comp. So there are GP, if you look at our gross profit, it was up 20.5%. So that’s the – obviously, the variable and the variable comp for your OpEx models. But I do believe this is a good quarter. We have made some significant investments that we are starting to see some benefits in our operating income. If you look at over trailing 12 months versus this quarter, trailing 12 months, our operating income is up about 7%. This quarter, it was up 15.5%, with some onetime earn-out fees as well. So it would have been a little bit higher. So we’re starting to see some nice movement there.

Okay. So I am assuming you are going to continue to invest, but do you expect to – from revenue to outpace kind of incremental operating expense growth?

That’s a tough one, Greg. Here is the easier thing. We will continue to invest because we are seeing where we believe we are grabbing some market share. So we built out the solutions and services that a lot of our customers need, whether it be in the cloud or security or digital space and then all the services that go with it. So we’re going to be opportunistic, both in terms of organic hires as well as M&A. So I think you’ll still continue to see that. What I’m trying to say to you is, we’re – our gross margins are probably some of the highest in the industry. So it’s going to be tough to continue to drive that. Now driving our service numbers up will help drive that blended margin up, but overall, OpEx is probably where we are at is probably a good starting point.

Okay. And then with what you did with SLAIT, maybe ABS, in Mid-Atlantic region. Are there other geographies where maybe you don’t have – what other geographies are out there where you don’t have a footprint yet?

Okay. Yes, good question, Greg. So if you know ePlus, we pretty much have both coasts covered pretty tightly. I would think the Great Lakes area would be one. We’ve got a presence in India and Chicago and Minneapolis. We can probably build out at Ohio, Michigan area. I think the south of the Southeast I think we can do a little bit more to build that out. We’ve got a presence in Texas as well, but probably can build that out a little bit. Those would be the ones off the top of my head. We’ve also got some opportunities as we talked about on other calls about some global expansion, but that’s going to be done. We’re really going to do that methodically and really kind of analyze where it makes the most sense where we can build some size and scales to make – size and scale to make a difference.

Okay, thank you.

Alright, Greg. Will see you.

Your next question comes from Matt Sheerin from Stifel. Your line is open. Please go ahead.

Yes, hello. This is Kurt Swartz on for Matt Sheerin. Good afternoon. Just another follow-up question on the recent acquisitions, looking at ABS Technology in particular, hoping you can maybe shed some more light on what the contribution might be in the coming quarters? And any sort of insight we can gain on OpEx impact for the coming quarters as well?

Yes. I think easiest thing I can tell you, ABS, we think is a really good acquisition for us. It rounds out our capabilities in, what I would call, at Southern Virginia territory of the Mid-Atlantic, but it was a tuck-under acquisition. So I wouldn’t expect anything big to start. Now over time, what you’ll see, hopefully, is that as the ABS team understands all the different types of offerings that ePlus has, we’ll be able to add that to their portfolio that they can go back to their customer base. But normally, it takes a couple of quarters for the acquisitions to kind of get up to speed and then understand all the different offerings we have and then kind of build from there. But it was kind of a – it was more of a tuck-under acquisition to build out some capabilities and pick up some really good state local and education as well as health care customers as well as a really good team. We’re pretty excited about what we picked up with the ABS team.

Understood. And then shifting gears a little bit, just sort of looking at – we continue to hear news about deal timing issues and some large deal push-outs, just wondering if that’s anything you have been seeing, whether that’s been affecting the deal – the timing of deals closing or any other color you could offer on just general customer sentiment?

Yes, haven’t seen any of that, to be honest. And I want this to come out the right way. Based on the quarter, we have a pretty solid quarter where adjusted gross billings as well as net sales were both up over 19% and GP over 20.5%. So didn’t see deals being pushed out. Now some of the good deals obviously take time, but that’s been the case for a long period of time here at ePlus. So not seeing anything where customers are moving slower yet. We are pushing things out just yet.

Great. Thank you very much.

Alright, thanks. Will see you soon.

[Operator Instructions] Your next question comes from Brett Knoblauch from Berenberg Capital Markets. Your line is open. Please go ahead.

Hi, guys. Thanks for taking my question. Maybe just one for Elaine on that tax guidance you gave. Is there any particular reason why that its effective tax rate looks to be increasing a bit year-over-year?

Yes. On a year-over-year basis – year-to-date basis, there were some benefits that we received in the prior year for stock vesting, counteracting that is an increase in some permanent differences that we’re seeing. So we’re actually expecting the tax rate to be about 29% for the remainder of the year.

And then maybe just directionally for 2020, do you see that kind of falling in the same general area?

Yes. I would say it’s probably going to be in that general area.

Okay. And that’s it for me. Thanks, guys.

Thanks. Take care.

Thanks.

There are no further questions at this time. I would like to turn the call back [Technical Difficulty] CEO and President.

Okay. Thank you. Hey, everybody. Thanks for joining the call today. We appreciate you spending the time with us. As we stated, we thought it was a solid quarter and first half for ePlus. And we believe we’ll continue to outpace the overall IT spend market based on some of the execution on our strategy. With that, I hope all of you enjoy your Thanksgiving, and I wish you the best for the holiday season as well. Thanks for joining us today. Take care.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.