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, Senior Vice President. Sir, you may begin.

Thank you for joining us today. On the call is Mark Marron, CEO and President; Elaine Marine, 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 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 September 30, 2020, when filed. The company undertakes no responsibility to update any of these forward-looking statements in light of 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, Klay, and thank you, everyone, for participating in today's call to discuss our fiscal 2021 second quarter results. There are several key takeaways from the quarter that I believe are important. First, we continue to successfully execute in a challenging business environment, supporting our customers with the solutions and services they need while addressing the health and safety of our staff. Second, we are leveraging our scale and broad capabilities to address the IT requirements of enterprise customers where demand for products and solutions was strongest in the second quarter, and we continue to serve our mid-market customers as well, many of whom have required additional value-added services from us, as they are experiencing reduced staffing levels, yet need to support remote workforces, as well as continue on the path of digital transformation to remain competitive. Third, we are focused on optimizing our cost base while aligning resources to focus on growth areas and meet our customers' needs. Second quarter operating expenses declined 5.6% year-on-year, attributable to reduced travel and entertainment expense, and we are looking for long-term structural savings in areas such as facilities. During the quarter, operating income was up year-over-year, even with a tough comparison. Next, our portfolio approach of offering technology and financing to our clients provides ePlus a competitive advantage during these uncertain economic times. And finally, ePlus' strong balance sheet gives us the financial flexibility to make organic investments to drive growth and to consider acquisitions. Our second quarter was another period of strong execution in a challenging business environment. Our team continues to operate effectively and support our customers with the products and services they require for remote and hybrid workforces. We have continuously adjusted our go-to-market plans and services delivery models to meet the challenges of the current environment. The…

Thank you, Mark, and thank you, everyone, for joining us today. We are pleased with our fiscal 2021 second quarter results. Our consolidated net sales for the second quarter were $433.1 million, an increase of 5.2% from the prior year's quarter, mainly due to increased demand from our enterprise and state, local, and education customers, and particularly for product sales, as we sold more hardware during the quarter. In the technology segment, net sales increased 5.4% year-over-year to $419.4 million, with product and service revenues increasing 5.8% and 2.8%, respectively. The increase in service revenues was due to our emphasis on managed services and, in particular, strength from our enhanced maintenance support offering. Adjusted gross billings were $601.1 million, a 3.8% increase from $579.1 million in the year-ago quarter. The adjustment from adjusted gross billings to net sales was 30.2%, compared to 31.3% last year, as we had a particularly strong growth period for sales of third-party maintenance software and services last year. Financing segment revenue decreased 0.9% to $13.7 million, as an increase in transactional gains was more than offset by lower post-contract earnings during the quarter. 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, telecom, media and entertainment, and technology continue to be our two largest customer end markets, accounting for 20% and 19% of technology net sales respectively. State, local, and education, health care, and financial services followed, accounting for 16%, 15% and 13%, respectively. The remaining 17% were distributed among several other customer types. Consolidated gross profit decreased 3.9% to $99 million from $103 million in the prior year. Consolidated gross margin was down 210 basis points to 22.9%, compared to 25% last year. Gross profit for…

Thanks, Elaine. I'm pleased with the ability our team has shown over the last few months to pivot where the business has shifted and to sell the solutions and services that are most in demand. We continue to manage well through a difficult environment and have taken steps to emerge a leaner enterprise, align the growth areas, and with a lower cost base. Our competitive advantages, including our highly qualified team of sales professionals and engineers and our strong balance sheet, support our long-term growth potential. Operator, I would now like to open the call for questions.

[Operator Instructions]. Your first question comes from the line of Maggie Nolan from William Blair.

I know, Elaine, you were saying that it's difficult to assess the impact of COVID from here on out. But a lot of companies that have been seeing that maybe the June quarter was kind of the low point, from a COVID standpoint, for a lot of the services businesses. As you look at the next couple of quarters, do you think you can build on the sequential growth, kind of continue that trend going forward? Just keeping in mind that COVID aside, you've got some tough compares on a year-over-year basis as well, particularly coming up in that December quarter.

Yes. Maggie, it's Mark. So related to services, one, it was a tough compare. So last year, it was up roughly 35%. What we saw in the services space is a couple of different things we've talked about over time. In the annuity part of our business was actually pretty strong. So the things we've talked about with managed services, enhanced maintenance services, was actually pretty strong and what kind of carried our services. We did see where there were some projects where customers were just buying products in some of the enterprise accounts. And we also saw some of the, what I'd call, project services and staffing was actually down year-over-year, mainly due to not being able to get on site at our customer sites.

Got it. Then, as you think about moving forward, less direct contact, as you were just kind of mentioning, have there been changes to the pricing structure of your services deal?

To the pricing? No. No difference on the pricing. In fact, what you normally see in that space and what we've seen, Maggie, if you're providing the right value from a consultative and annuity, the customers are willing to pay for it because they need the service. So, haven't seen anything dramatically related to any kind of what I'd call price reductions in that space.

And then, on the margin side of things, in the prepared remarks, you mentioned some long-term structural savings. Can you give us an idea of what the new kind of normalized margin profile of the company might look like, given some of these structural changes to expenses?

Yes. Well, Maggie, there's a few things there, so I'll do kind of your gross margins and then drop down to your, I'll call it operating margins for lack of anything else. On the gross margins, what we saw this quarter was it was a really tough compare to last year, if you look at our margins. So that was the first thing that came into play. The other things that affected our gross margins this quarter, one was a lower gross to net, which affected our margins by about 100 basis points. We also -- as we talked on prior calls, it was in land and expand in this case, but we had some of our bigger enterprise customers that were buying laptops, kind of the commodity play that we don't normally play at, that we're at lower margins. So, between the tough compare, the gross to net, and kind of the product margins on some of those bigger deals, that's what affected our gross margins. What I think you're starting to see in our OpEx is we've obviously seen savings in our travel and entertainment. You're seeing some savings in our acquisition-related cost, if you will. And I think over time, you'll see a little more operating leverage as it relates to just operating expenses overall as we go forward, as we kind of streamline things. For example, when folks are leaving through attrition, we're not hiring. We are making hires as it relates to strategic hires, but I think you'll see some savings as we move through the coming quarters.

Your next question comes from the line of Matt Sheerin from Stifel.

A question, Mark, just following up on Maggie's question regarding demand. You did talk about you saw a big increase sequentially in products, but it sounds like more transactional type of products. You did talk about client devices and laptops, but could you be more specific in terms of what you're seeing? And is that more on the client device side versus network infrastructure, storage, and servers?

Yes, Matt. So we did see some on the device side that we normally don't cite. As we've kind of talked about in previous calls, we moved away from the commodity play years ago and kind of try to move towards further value-add with the services and higher-end kind of value products. With that said, in the new market that we're in with COVID, we've had some of our bigger customers looking for some serious laptop orders that we've been able to fulfill, as you know, at lower margins. With that said, though, we're still fulfilling infrastructure needs for our customers, so as they're building up their devices and working from home, we're building out their infrastructure. We're supporting a lot of customers' move to the cloud. And then, we're seeing a lot in the collaboration and security space as well. So it's kind of across the board what we're seeing there. We are seeing a little uptick in software as well, with some of the software players that are out there, with customers leveraging what we call enterprise license agreements. So, kind of gives them the flexibility on licensing, and also, in some cases, it reduces their cost that they make a longer-term commitment. So we're seeing some of that as well, Matt.

And in terms of the strength that you're seeing on the product side, are you seeing that continue, where there's some backlog, particularly maybe on the client devices where there's still some product constraints, and particularly on -- in the enterprise -- I mean, sorry, the education space with Chromebooks?

Yes. Well, not so much in the education space for us, Matt. That's not where we play, as we've talked about, with Chromebooks. So, for us, our SLED was up nicely. And a lot of it, believe it or not, was in the state and local space that was up real nice for us. And the reason being is. leveraging some of our financing capabilities, we're able to help some of those state and localities that are going to have some issues due to tax revenues going forward. So we had a nice quarter for SLED overall, but state and local was up. K-12 was up, actually, with some devices, and higher ed was actually down a little bit this quarter, where last quarter it was up.

Okay. And just talking to customers, and I'm sure all of your sales folks have been talking to customers, what's your sense of budgets? Are you going to see kind of the normal budget flush? Or are things on hold and things being switched around just because of priorities and still COVID concerns?

Yes. Good question, Matt. I think it's a few things. I think things are being moved around a little bit based on what technology needs the customers have. Some are trying to do a -- what I'd call a leap forward in buying newer technologies to kind of enable their business from a digital transformation. But to be honest with you, it's still really hard, Matt. If you think of what we're going through with COVID and how hard it is to predict and all the uncertainty there, then you throw in the election and not knowing what's going to happen with the [indiscernible] Act or the stimulus, which could help with some of the spending and some of the verticals that we play in, it's kind of tough to predict. We are seeing that the enterprise seems to have the budget to be able to make the purchases they need to make. And others, it's on a case-by-case basis. But we are seeing some budgets being extended and some sales cycle being extended due to COVID.

Okay. And just last for me on the M&A front, and you've certainly been very active there, and it's been a big part of the growth strategy. Just can you talk about in an environment now vis-Ã -vis COVID and potential challenges there in terms of doing deals?

Yes. Matt, it is active. So there are a number of companies that are out there, actively looking to be acquired, so the market hasn't slowed down as it relates to opportunities. Where it gets tougher is, normally, you'd go and do your due diligence on site, and with COVID, with all the regulations across state lines, it makes it a little bit more difficult and probably extends the timeline in doing M&A, based on having to do a lot of it virtual versus face-to-face. And then, also, understanding once you -- when you're acquiring a company, you kind of want to sit across from the people and get to know them and have them get to know you to feel good. So some of that has obviously slowed down due to COVID. But in terms of opportunities and acquisition opportunities that are out there, it's still fairly robust across the board, both from a territory and from a technical standpoint.

[Operator Instructions]. Your next question comes from the line of Brett Knoblauch from Berenberg Capital.

I was wondering if you could maybe expand on the headcount reductions you talked about. Is this maybe due to combination of attrition? Is it downsizing? Or are you guys just trying to drive efficiencies? And maybe, what do you expect that to look like going forward?

Yes. I think, hey, Brett, it's more about realigning. So, as the market is changing, as it relates with the drive towards cloud, all the security opportunities that come into it, the consultative opportunities that we're seeing from our customers that need, we're kind of realigning resources. We've made some decisions with underperformers, so make no mistake about that, and through attrition where we haven't backfilled. So we've been able to pare back the headcount that way, in a logical way. We've made the commitment to our employees that we're keeping everybody and doing everything in our power, but we're still going to continue to manage to the business. The other thing is we do have recs open, so there are hires that we want to make. And based on what Elaine talked about in her piece, our financial stability kind of gives us -- our balance sheet gives us that ability to make those decisions as we move forward. I think -- any other questions?

There are no further questions at this time. I turn the call back to Mark Marron, CEO, for closing remarks.

All right. Thank you. If I could, thank everybody for joining us. And more importantly, hope everybody has a healthy and happy Thanksgiving and holiday season. With everything we've gone through in 2020, just enjoy your family and friends, be safe, and take care. We'll see you in February. Thank you.

Thank you, everyone, for joining. That concludes today's conference call. You may now disconnect.