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, CFO; Darren Raiguel, COO and President of ePlus Technology; and Erica Stoecker, 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 in our periodic filings with the Securities and Exchange Commission, including our Form 10-K for the year ended March 31, 2020, and our Form 10-Q for the period ending June 30, 2020, when filed. The company undertakes no responsibility to update any of these forward-looking statements and 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'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 fiscal 2021 first quarter results. ePlus performed well in a dynamic business environment. Our solutions portfolio is positioned to support our customers' needs in critical areas, including cloud, collaboration, software, data center and security. Our strategy to bolster recurring and annuity type revenues has continued to gain market share and provides a more consistent baseline of revenue and profitability for ePlus. We focused on midsize to enterprise customers with good credit quality, and we believe we have minimal exposure to the most at-risk industry verticals like retail, hospitality and travel. We believe our 30-plus years of providing leasing through our financing segment has provided us with risk management knowledge and experience to successfully navigate through economic downturns. We have remained fully operational during the pandemic, shifting much of our business to accommodate work-from-home mandates and take appropriate precautions for health and safety of all of our employees. I want to commend the entire ePlus team for pulling together and showing tremendous dedication to our company and its values. As a result, we were able to expeditiously serve our customers and effectively support their critical IT needs. A key measure of our success in the quarter was a 6.4% increase in gross profit and a strong consolidated gross margin of 27.8%, driven by a very favorable business mix in the quarter, including a larger component of third-party maintenance services and subscription sales. Services revenue increased 4.4%. While we do not expect this quarter's uncharacteristically high-margin level will be replicated in future quarters, it is consistent with our history of achieving industry-leading gross margins as compared to our peers. Taking a closer look at first quarter results. While Technology segment net sales declined 7.4% to $341.2 million,…

Thank you, Mark. And thank you, everyone, for joining us today. Starting with our overall financial performance, in the first quarter of fiscal 2021, consolidated net sales amounted to $355 million, 6.9% below the $381.4 million reported in last year's first quarter, mainly due to an increase in sales of third-party maintenance, services and software subscriptions, which are recorded on a net basis. For our technology segment, revenue was $341.2 million compared to $368.5 million in last year's first quarter. The 7.4% decline was primarily due to an increase in sales recorded on a net basis. Service revenues increased 4.4% to $47.8 million due to an increased demand for managed services. Adjusted gross billings amounted to $546.4 million, modestly lower than last year's $548.4 million. The adjusted gross billings to net sales adjustment was 37.5% compared to 32.8% in the first quarter of 2020, for the same reason net sales decreased. Our financing segment revenue of $13.8 million increased 7.6%, mainly due to an increase in post-contract earnings from term extensions of certain lease schedules. As a reminder, results for this business can be uneven and difficult to predict. Consolidated gross profit increased 6.4% to $98.6 million from $92.6 million. We reported a consolidated gross margin of 27.8%, which widened 350 basis points from last year's first quarter and was a highpoint in our history, driven by gross margin improvements in both segments. Gross profit for the technology segment increased 6.1% to $86.8 million and gross margin of 25.4% increased 320 basis points. Technology product margin increased 350 basis points to 23.5%, primarily due to an increase in sales of third-party maintenance, services and subscription licenses, which are recorded net. Services margins increased 20 basis points to 37.6%, primarily due to our managed services. The financing segment's gross profit increased…

Thanks, Elaine. Our fiscal 2021 first quarter results demonstrate the relevance of our key focus and the important role that ePlus plays in supporting customers as they navigate a rapidly changing business landscape. We effectively managed through a difficult business environment in the first quarter and are prepared to meet the challenges ahead, thanks to our large and diversified customer base, which has limited exposure to those industries hardest hit by the pandemic, our strong financial position, and most importantly, a collaborative culture that defines ePlus. All of this gives us confidence in our long-term growth potential. Operator, I would now like to open the call for questions.

[Operator Instructions] Our first question is from Maggie Nolan with William Blair. Your line is open.

Hi, Mark, Elaine, it's Ted on for Maggie. Can you talk about the demand environment for products and services as the quarter progressed into July and August here as well? Has the demand for products trough, do you think? And is it reasonable to expect a continuation of growth for the services kind of at the same level we saw during the first quarter?

So first of all, Ted, how are you? And tell Maggie, we said congrats on the birth of her daughter, okay?

Yes, will do.

All right. So a couple of different things. I think when we talked about last quarter, we had talked about that April was kind of in line. So I'll talk about this quarter, and then I'll try to give you a little bit going into this quarter, meaning July through September quarter for us. So April was kind of in line with expectations. Overall, the quarter kind of wound up to we thought the way it would. We had a little bit of slowdown at the end of the quarter. Some of the projects slowed down, couldn't get on-site with some of the services. So even though we had growth of 4.4% on our services overall, there were some opportunities that we couldn't get on site. The demand that we saw was a little different than – I won't say different than normal. We're in the right focus areas. So everything was really around workforce enablement, remote workforce enablement. That includes collaboration, communication. A lot of companies didn't have data center capacity, believe it or not, for all of remote users that they were dealing with. A lot of companies were looking at security solutions in terms of kind of secure access as people are trying to access data from their home, and a lot of folks were moving quickly to the cloud. So for the quarter, it was kind of in line with expectations, a little slow going into the end of the quarter. It would be for Q1. For Q2, it's kind of along the same line. So I can only speak to July, it was kind of in line of where we expected. We still have good visibility into our pipeline overall. Services is a little challenging for a couple of different reasons: one, getting on site. Some of the schools, not being able to get on site, for example; staffing, some of the folks have slowed down a little bit on staffing. But with that said, we've seen pickups in other areas on services with our consultative services and customers looking at our annuity services. So that would be it at a high level.

Okay. Great. That's really helpful. Can you talk about the higher education and the state and local market exposure there? And just kind of what you're seeing from a budget standpoint, just given everything that's going on within those end markets?

Yes, not a problem. So if I look at the different verticals, but I'll start with state and local and education. So state and local was actually flat for us. For the quarter, our K-12 was actually down, and that's really – we don't play in the commodity space, Ted, in the K-12. So a lot of the chromebooks, laptops, that's not really our space. So it's more of the, I'll call it, the higher-margin infrastructure play. So that was down a little bit, but higher Ed was up. So net-net, our overall SLED, state, local and education, was up year-over-year. I think the one that's kind of – I won't say obvious, health care was down for us. And I think that's due to a lot of things that I think everybody would realize as it relates to what they were dealing with overall in terms of just dealing with the patients, no elective surgeries. Quite honestly, we were just trying to do anything we could help our healthcare customers kind of get through this pandemic any way we could. But SLED went up overall for us year-over-year, and state and local was flat, K-12 was down, Higher Ed was up.

Great. I wanted to ask about the mix of – the services mix, in particular. I know the margin picked up this quarter. Can you talk about just kind of the mix of staffing and professional services in this type of environment? And I think you had been seeing a little bit of trend towards staffing and increasing that as a percentage of revenue? Have we kind of hit the – from a mix standpoint, hit the peak mix of staffing within the services?

No, I don't think we've hit the peak, Ted. I think what you have going on right now is a lot of folks are trying to double down in terms of focusing on what they need to enable their remote workers to do whatever their job is. So they're investing in, like I said, the communication and collaboration tools, security, data center and network capacity tools, trying to leverage the cloud. A lot of customers are trying to leverage our financing capabilities, so as they've had some projects that are unexpected budgets, trying to get some short-term relief. As it relates to services, we don't break it out by individual pieces, as I think you know. But I can tell you the consultative side of our services is really picking up as we're providing solutions that customers need, whether data center and cloud related, security and risk related. Staffing is down a little bit. But I believe as we move forward, I think as customers – as COVID, hopefully, starts to lessen, and that's what I'm hoping for in the future, even though it's very uncertain. I think you may see a pickup in staffing as that comes back. And there's a little pressure on our professional services, mainly for the reason that I mentioned earlier about being able to get on site.

Very good and so if I could slip in the last question here. What was the organic growth this quarter? Thank you.

You know I – do you know what the top of your head…

It was primarily organic. Yes, there was little contribution from the acquisition.

There you go.

All right, thank you.

Yes.

All right. Take care, Ted.

Our next question is from Greg Burns with Sidoti & Company. Your line is open.

Good afternoon.

Hi, Greg.

Hi, Greg.

Just a follow up on the last questions. I wanted to get maybe your view on kind of the sustainability of the current trend? Because I would assume there was an initial rush to kind of set, businesses up to support remote working and other things. So I just wanted to see if maybe you felt like you had this initial push and then maybe we see a fall-off? Or maybe this is just accelerating longer-term trends. So it's more sustainable. But what's your view on that and how the market is kind of reacting in the current environment?

Yes. Greg, that's a tough one, only for one reason. With all the uncertainty with COVID, none of us have a crystal ball, unfortunately. So I think the longer the spikes and kids staying out of school, I think it's going to be tougher and tougher to predict. But if I were to go with some of the industry experts, what they're talking about, you would expect cloud spend to be up by a decent amount. You'd expect security spend to be up by a decent amount. I think a lot of customers have kind of multiple kind of collaboration and communication systems in place that they're probably going to want to convert into one kind of solution. So I think there'll be opportunities for us there. And I think there'll be consultative opportunities for us to help customers, whether it's with data center capacity issues, whether it's cloud cost optimization, I think you'll see a lot of folks as they've rapidly gone to the cloud. There's 2 things that I think will happen is, one, I think the spend, at some point, is going to – they're going to get the bill and have a little sticker shock. And two, I think moving that quickly, there may be some security risk that they're taking that they're going to have to address,

Okay. Okay. And then in terms of the gross margin, I know it's going to be driven heavily by mix. And like you mentioned, this is a record quarter. But how should we think about this going forward? Has it stepped up to another kind of tier or another level structurally going forward? Or should we model somewhere in between kind of where it was and where it – historically and where it was this quarter? Or how should we think about maybe the mix of the business and the gross margin going forward?

Yes. A couple of things. One, did we say record quarter? I don't remember that, Greg. So maybe you did, but I'm not sure we did, okay? When I look at it, this one will be really tough to replicate. There's a couple of things that went into it. We had a very high gross to net, so there were a lot of customers that were renewing maintenance for an incremental year just from a budget perspective. We also had a big uptick in subscription sales, which are taken on a net basis. We also had an uptick in our services margins. I think it was 20 basis points. So I think those 3 contributed to it, but this is significantly higher than our traditional norm. And I don't believe this is something that's the new norm. Now with that said, we're pretty excited about where our margins has been going as we've talked about in prior calls. So over time, if our services, our annuity services and consultative continue to build, I would expect it to trend up over time, but this is not the norm. This is more an exception based on what happened this quarter.

Okay. Then lastly, just looking at the financing business. I know you always mentioned that it can be lumpy and very transactional base, but it seems to have pretty consistently over the last 1.5 years or so kind of at these levels, and these transactions have continued. So are you – has the – are you investing more in the business? Like why has it grown structurally? And this is, again, like kind of a new normal for this business where it's maybe operating at a higher level than where it has been historically and that's sustainable? And then in terms of the incremental debt you've taken on the nonrecourse, and I think actually recourse debt was up last quarter. Is that tied to kind of growing your focal leasing business? What's that related to?

Okay. I'll let – you want to deal with the portion on recourse? But just look at a high level, we've made investments in our leasing over the years. We believe we've got a pretty good team that's done a really nice job. But what's not going to change, Greg, it's going to be lumpy. There's many large deals or transactions that come in quarter-over-quarter, year-over-year, some happen, some don't. So I think that will continue. The other thing that comes into play now when you get into a tight credit market like we're in, some of the funding from banks and things along those lines. And also, there's credit things that we have to think through with deals that maybe in the past, we would have took, let's say, in the retail space that now may not take. So there's a lot of variables that go into that. But I would – I don't think we're ever on a path just yet with our financing team where it's stable. It's going to be lumpy as we continue. And I think, quite honestly, we've got a tough compare in Q2 compared to last year with our leasing numbers or finance numbers.

Yes. And Greg, to address the nonrecourse debt, it's really related to the increase in the portfolio. So it correlates to that. In terms of the nonrecourse increase, that is related to the Wells Fargo facility. We had $35 million outstanding on that line as of – actually as of 3/31, and we'd carry that through 6/30. We have since repaid that, but it was outstanding as of 6/30.

Okay, great. Thank you.

Sure.

Thanks, Greg.

Our next question is from Kurt Swartz. Kurt, if you could also provide your company name. Your line is open.

Hi, yes. This is Kurt Swartz from Stifel. I'm on for Matt Sheerin today. How are you all?

Hi, Kurt.

Hi, Kurt.

So I'm hoping you can maybe provide a little bit more color on some of the OpEx dynamics during the quarter. And whether there are any COVID-related costs included in those numbers as well as how we should sort of think about the current OpEx levels on a forward-looking basis.

Okay. So a couple of different things. One, I think OpEx, it's probably at a good run rate in terms of this past quarter, work from a modeling perspective. A couple of different things happen in the quarter. One, we had higher GP. So the variable in terms of commission was higher as it relates to GP. We made some investments in higher end, what I'd call, solutions and services talent that I think increased our salaries as well, even though headcount effectively was flat. There were a few things as it relates to our utilization rates with services that fell in SG&A versus COGS. Trying to think of what else from a salaries and a benefits, anything else?

Probably – yes, nothing else from the salaries and benefits. But to address the COVID question, as it relates to cost, we had immaterial costs related to COVID. We did buy some additional equipment for folks that were at home, but it was pretty immaterial. Some PPE costs, things like that, but nothing material that you would notice in the quarter?

Yes, Kurt. One other quick thing, just overall, we had lower travel and entertainment as well. So that kind of affected the quarter. And if you look at it sequentially, what was nice about our numbers sequentially, our GP, our gross profit, was up about $6.7 million, and our SG&A, overall, was down about $0.5 million. So in terms of trending, that was a nice trend. But I would think this quarter, is a nice one to model of.

Understood. And then I guess sort of sticking with the COVID theme, were there any supply constraints to speak of during the quarter? Or any other supply chain issues that you had to sort of navigate?

No, nothing much. There are a few things shipping at the end that kind of affected our numbers, but I wouldn't say it's anything material. Some of the cycles were a little bit longer, but nothing that I would call dramatic or material, Kurt.

Got it. And then I guess, just overall, maybe as you're looking at fiscal year 2021 or I guess, maybe in the next 12 months. Have you – I guess, maybe internally discussed any sort of assumptions for IT spending over the next 12 months? Or how you're exactly looking at the spending environment currently on a forward basis?

Kurt, that's a hard one to look at. As COVID continues, the uncertainty makes it tougher, I think, everybody to kind of project and predict what's going to happen. We kind of track things by customer, by vertical, by different functional area. If you think about the different verticals, the nice thing there is we're not exposed in some of the harder hit regions like retail and oil and gas and hospitality. But also, even if you think about some of the verticals that were up year-over-year or trailing 12 months, it's not just those verticals. It's the customers that they're selling to that we have to kind of factor in. So it gets very tough to kind of predict where things are going to go. I will tell you, we feel pretty good about this quarter. It was a solid quarter in contributions from both of our segments. We liked all the profitability metrics in terms of GP, gross margin, operating income, EPS were all very positive for us. But predicting going the rest of the year in the future, be really tough with what's going on in the market.

Understood. And then maybe one more, if I could. You touched on it a little bit during the prepared remarks, but the inventories levels were a bit elevated in the quarter. And I know you said that sort of fluctuates based on projects in the pipeline and whatnot. So if you can maybe provide any additional color there, that'd be helpful.

Yes. The inventory had increased to $93 million at the end of the quarter, about $40 million or so. And it was really related to many different customers. There were a couple of larger customers that had multiple projects underway that we were working on, but that should get relieved here over the next couple of quarters.

Understood. Thank you so much.

You’re welcome.

Take care, Kurt.

[Operator Instructions] And ladies and gentlemen, this does conclude our Q&A period. I'll now turn things back over to Mark Marron for any closing remarks.

Okay. Thank you, everyone, for taking the time to listen to our call today. We look forward to seeing you on investor road shows in the future, hopefully, I should say. And then if not, speak to you at next Q2 quarterly earnings. Take care and be safe.

This concludes today's conference call. Thank you for your participation and you may now disconnect.