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 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, 2021, 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 fourth quarter and fiscal 2021 results. Fiscal 2021 was a very successful and productive year for ePlus, as we advanced our growth strategy and broadening our capabilities, while increasing our margins, earnings and adjusted EBITDA. I'm especially pleased with the gains we saw in our gross profit and gross margin, which demonstrate that our strategy is delivering high value solutions and services is working and resonating with our customers. I'm extremely proud of the entire ePlus team which move quickly to solve the challenges our customers face, as they transition to remote and hybrid work environments, requiring advanced collaboration, networking, cloud and security solutions. Our successful execution in this environment speaks to our continued strategic focus on these areas, and to the commitment and dedication of our people, we supported our clients with innovative solutions, and what was one of the most difficult operating environments in recent memory. Although, net sales were down slightly in the fourth quarter, we achieved significant growth in our profitability, as fourth quarter gross profit increased 6.6%, and gross margin expanded by 270 basis points to 27.8%, the highest showing in our history. The solid gross profit and margin performance helped drive 31.9% year-over-year growth in our fourth quarter operating income on a consolidated basis. Our tech segment performed especially well with a 49.3% increase in operating income. We also achieved a 25.7% increase in fourth quarter adjusted EBITDA to $29.6 million. Software subscription sales have become an increasingly significant component of our revenue and profits and earnings. For our customers, software subscriptions provide several advantages including real-time updates and technical support. For ePlus the trend towards subscription sales provides greater revenue visibility and predictability, and strengthens our margin profile…

Thank you, Mark, and thank you, everyone for joining us today. Starting with our quarterly results, fourth quarter consolidated net sales declined 3.8% to $352.6 million, compared to $366.5 million reported in the fourth quarter of fiscal 2020. In the technology segment, net sales declined 6.1% to $331.8 million due to a decrease in product revenue of 8.4%. Meanwhile, services revenues were strong, again increasing 8.2% to $52.9 million as we benefited from our focus on managed services. In addition, adjusted gross billings increased 2.8% $528.6 million, compared to $514.1 million in the same period a year ago, which benefited from our acquisition of SMP on December 31, 2020. The adjusted gross billings to net sales adjustment was 37.2% in the fourth quarter of 2021, compared to 31.3% in the year ago quarter, due to a larger proportion of revenue recognized on a net basis, in particular, the sale of a large maintenance transaction. Our financing segment revenue grew 57.4% to $20.8 million compared to $13.2 million in the last year's fourth quarter, due to sales of off lease equipment of $8.2 million during the quarter, up from $700,000 last year. As I have mentioned in the past, results from our financing segment can be uneven from period to period. We're very pleased with our consolidated net gross profit growth of 6.6% to $97.9 million compared to $91.8 million last year, and consolidated gross margin expansion of 270 basis points to 27.8%. Our technology segment gross profit increased 5.3% to $83.9 million. Product margin increased 260 basis points to 22.6%, due to higher sales, third-party maintenance and software subscriptions recorded on a net basis. Services margin increased 60 basis points due to an increase in revenue and gross margin from managed services. Consolidated operating expenses were $74.3 million, representing 0.5%…

Thanks, Elaine. So to sum up, fiscal 2021 was a very successful year for ePlus, as we executed well in a very dynamic and challenging environment. We remain positive on our outlook for fiscal 2022, backlog are increasing order backlog and our continued focus on the solutions our diverse customer base needs in the areas of cloud, security, digital transformation and collaboration. Additionally, our firm balance sheet allows us to make opportunistic acquisitions and investments to adjust to dynamic market conditions. We will continue to work hard to support our SLED mid-market and enterprise customers with customized IT solutions and services to smoothly enable their transition back to the traditional office environment, or their implementation of flexible hybrid work models. Operator, I would now like to open the call for questions.

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

Thanks. Hi, Mark. Hi, Elaine.

Hey, Maggie.

I wanted to ask about the access to customer site. Can you give us an update on what you saw there in the fourth quarter? And then if there's been any change kind of as we move into April and May here.

So far, no change Maggie, not a lot of access to customer sites, a lot of it's based on the different states and the requirements and regulations within those states. We've seen where customers are pretty comfortable with us providing solution services consulting remotely. We are seeing things start to pick up where people are starting to go back in a kind of hybrid work environment. We'll probably expect that to continue for the next few months before you see more people in the offices that we can actually visit on a regular basis. I will say this though I'm proud of our team, the way they've kind of adjusted with the work from home and in terms of how they're going to market, in terms of touching, supporting and servicing our customers.

Okay, thanks. And then Mark, what are you seeing in the way of inflation and the pricing environment, particularly as the component shortages continue?

Maggie, I think that'll start to pick up so as the shortages potentially become a little more prevalent, I think you may see some things there. We haven't seen much yet. We're in constant contact with the OEMs, talking to them about any changes or things that they're seeing related to inflation/pricing increases. We haven't seen much yet, but would expect we might see a little bit of that in the future.

Okay. And then last one for me, the services business outperformed well. Can you talk a little bit about the underlying momentum in that segment, both outside of the impact of the acquisition of SMP and when you think about the synergies that that acquisition could create? Thank you.

Okay. Yeah. So that's a couple different things there, Maggie. So good question. Look on services, we feel really good about our services. We've talked about it for a while. This quarter, we were up 8.2% year-over-year, and our gross margins were up 60 basis points. So a lot of what we talked about in prior calls are what I'd call managed services or annuity revenues have picked up nicely and continue to pick up. So as we've had a little bit of a flattish, I'll call it transactional services, professional services, staffing, we've been able to grow our services based on work that we've done in prior quarters, prior years, that's now ratable revenue falling into this quarter and then subsequent quarters. Overall, though, we are starting to see some pickup in what I'd call the transactional services, both from a professional services but also more importantly, from a staffing. We're starting to see more and more customers look to start to fill headcount with staffing. And I think it's a fairly tight market right now. So, we're seeing some positive signs in the staffing side of our services business as well. SMP, we think is a great addition not only in the collaboration space, also in the data center space. So there's some things there that we're going to be able to try to leverage across the rest of ePlus over time. Does that cover everything, Maggie?

Yes, thanks for the time.

Okay. Speak to you soon. Take care, Maggie.

Your next question is from Greg Burns with Sidoti.

Good afternoon. In terms of the component shortages, and how that might be impacting revenue, is there any way you could maybe quantify that? And what's your view on the duration? Is that going to be something that's with you for a couple of quarters? Or, do you see that being more of a near-term problem?

Yeah, that's a hard one to predict. So first of all, I hope you are doing well. One, it's a little hard to predict, because here are some of the folks like Gartner that think it may go into 2022, most of what we're hearing from the OEMs is, maybe a quarter or two is kind of what the expectation is. But I think this is one that a lot of people are scrambling trying to figure out. The one thing for us they couldn't pack deliveries, but I don't think it's going to impact our orders. So we noted on my earlier comments our open orders are up significantly year-over-year. So a lot of the things that we're selling is out there and just has to get delivered, as well as our deferred revenue being up nicely, as well. So we're seeing a lot of things that are positive for the future. The one headwind is not really knowing for sure with the shortage, how much it could affect us, as we move into the next quarter and beyond.

Okay. And then, revenue was a bit lighter on the technology side, a little bit lighter than I think consensus was looking for. Can you just talk about that, whether it was some of this, like COVID-related, commodity type projects, maybe rolling off and now, we're in this kind of waiting period where we're waiting for companies to reopen and start spending more broadly? And then maybe just hand in hand with the backlog growth. Can you quantify how much the backlog is up year-over-year? And if looking forward conversations -- are the conversations with your customers now changing to kind of more what are IT spending rather than keep the lights on COVID spending?

Yeah, good question. So yeah, I think it's more about IT modernization and what we hear from a lot of our customers as we kind of come out of this pandemic, and the vaccinations kind of take hold. So a couple different things you touched on there. On the net sales being down, I don't consider that a bad thing. If you look at it overall, our AGB, adjusted gross billings was up 2.8%. We had a large gross to net, Greg, it was almost 600 basis points higher this quarter versus the same quarter last year, and it's mainly a factor of what we're selling, a lot of this software, subscription, ratable type things that our customers are looking for. So, if we didn't have that big gross to net delta at 600 basis points, let's say if it was flat year-over-year, our net sales probably would have been up around 5%. So, we look at it more on our orders are up meaning our billings is up. And then we look at the profitability side, which with gross profit up 6.6%. And just as importantly, operating income of 31.9%. We're more focused on the profitability than the net sales, because I think over time customers are moving to more of these as a service software ratable models, and that's going to affect net sales, but hopefully in a positive way. To your question, as it relates to kind of backlog, I'd call it an open order backlog is actually up about 70% year-over-year. So that's a real positive for ePlus, as we move forward. The only headwind on that is what I kind of mentioned to Maggie a little bit earlier might be some of the shortages, if you will, that would be the only thing there.

Okay. And then lastly, on the gross margin, record gross margin, really strong this quarter. It sounds like there's a large maintenance project and maybe kind of a good contribution from the financing segment. But how should we think about that going forward? I mean, I'm assuming the mix won't be as favorable, how should we think about the gross margin on a more normalized basis?

Yeah, on a normalized basis, I'd look at what we put up for the year, what we put on an annualized gross margin would probably be a good metric, Greg. This quarter, if you look at it, the large gross to net affected it what was nice, both our product and services, margins were up as well. So a lot of the value added solutions and services were selling are resolving with customers in this market. So it helped drive up the margins as well. But this was an outlier in terms of gross margin. So I think the annual that we put up for the year is probably a good metric to start with.

Great. Thank you.

Alright, Greg. See you soon.

Your next question is from the line of Matt Sheerin with Stifel.

Thank you. Good afternoon. A question, Mark just regarding on the gross margin, in the return to kind of more normal levels, is that just because of a product mix? Were you expecting a higher percentage of hardware on-prem hardware just because of the trends in the bookings you're seeing?

Yeah, I wouldn't say -- first off, hey, Matt. I wouldn't say based on the on prem, so let me explain this quarter and then I'll kind of tell you where I think things may be going is. First off, this was a large gross to net, it was 37.2% versus 31.3%, almost 600 basis points. So that had a big effect in driving the margin up higher to the 27.8%. What was nice on top of that, both our product as well as our service margins are up. So a lot of the products and more solutions that we're selling with the services that it encompasses, as well as our annuity services are starting to help drive our margins up. This was an outlier for a quarter though, that's why, as I was explaining to Greg, I think it's more in line with what we've done for the year is probably a better metric, as it relates to gross margin. Related to your on prem, yeah, we are seeing a lot of things that folks as they -- we work in this hybrid work environment, that there's things they have to do with their infrastructure, data center, modernization, even journey to the cloud. So I think there's a lot of things in there that should contribute positively to both our services and margins overall over time.

Okay. And could you be more specific in terms of the product areas and the strength or weakness, networking, versus storage, servers, et cetera? Any areas of pointing out?

Well, a couple different things. I think, if I were to think about it security, obviously, with everything's going on, and have been with colonial pipeline and solar winds and the executive order from President Biden, I think you're going to see some additional hardening, if you will, of people's infrastructure and in the access that they allow, and all the data protection. So I think there's a very strong chance that you'll continue to see an uptick in security. And I'm talking broadly in the market, not just ePlus. As it relates to networks, yeah I think you'll see some things with networks as 5G and other things move into play. As people try to do more with from a digital infrastructure, I think you'll see a pickup. I believe there's a play for storage for years and years to come, the reason being is there's an unlimited amount of data, both structured and unstructured out there. So those would be the players as well as cloud obviously is a big driver with what folks are trying to do as they try to make choices on where to put their workloads, and how to consume the cloud and all those other things. So those would be the areas that expect to see some uptick. I think a lot of the collaborations less communication, I think will continue as well. But I think you had a, I won't say a mad rush, but you had a rush with COVID for a lot of people to upgrade their systems, and I think that will continue over time as well.

Okay. Thanks for that. And just in terms of the end market, but I know you've got fairly diversification here. You've got telecom, financial services, SLED, healthcare. Any specific thoughts on those end markets that are you may be surprising to the upside or otherwise?

Yeah. Well, here's a couple different things, Matt. So healthcare was down, which we'd kind of expect with what went on with COVID. So with both, the hospitals and healthcare organizations focused on people as compared to some of the other things that they'd normally do. Tech was down for us and that's just a few customers, but that that kind of goes up and back and forth. What was nice, SLED was up both in the quarter as well as the year for us, a lot of that was in the state and local. So that's based on a lot of contracts and relationships we've built up over the years. So if I looked at it, it's not anything that surprised us. And it's kind of the normal, the top five verticals or our top five verticals with tech being down and telecom being up, but the others kind of being in line with what we've normally seen. And then we saw a lot of our, what I'd call mid-market to higher end employees as a percentage of the AGB in absolute dollars, I should say, is actually up. So the solutions we're selling is resembling with that mid to enterprise market. Those would be the things related to verticals and kind of customer size, if you will.

So it's something you're seeing some pickup in the mid-markets and finally, after a few quarters?

Yeah, we're starting to see it. And when I'd say mid-market, Matt, 500 employees and above, and that'll vary. So I'm very clear, that'll vary quarter to quarter, on a sequential basis. But, we're starting to see some things that are picking up in that 500 employees and above, if you will. And then, hopefully that'll continue. And then the below 500, we saw a little bit of a slowdown at least for this year, and I'm hoping that'll start to pick up in time as well.

Okay, great. That's very helpful. Thanks a lot, Mark.

All right. Thanks, Matt. We appreciate it.

There are no further questions at this time. I'd like to turn it back over to the speakers for any closing remarks.

Okay. Thank you. Hey, thanks, everybody for joining us. We feel good about the quarter. We feel good about how our teams adjusted in this COVID world, and feel like we're well-positioned as we come out of it. And just want to thank you for attending today, and look forward to seeing you on the next call. Thank you.

That does conclude today's conference. Thank you for participating. You may now disconnect.