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; 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, 2022, and our Form 10-Q for the quarter ended September 30, 2022, 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 results for the second quarter of fiscal 2023. Building on our first quarter performance, ePlus generated solid second quarter results with nearly 8% consolidated net sales growth and adjusted gross billings growth of more than 15%. We saw growth in most vertical markets and customer sizes, driven primarily by increased demand for our data center, cloud computing, networking and security solutions with particular strength from our mid- to enterprise-size customers. We believe our solutions, services and continued focus on our strategy plans has allowed us to continue to capture market share. I'm also proud of our team, which continues to execute at a high level, delivering strong top line growth while meeting our customers' needs despite persistent supply chain constraints. Our services business remains an important growth driver and an area of continued investment focus as our customers adopt a broad range of technologies to enhance productivity, increase profitability and drive revenue. Services grew 7.1%, primarily due to our managed services, which encompass our on-premise, remote and cloud offerings. Our managed service business produces consistent annuity quality revenue reducing quarter-to-quarter variability in our revenue stream. For our clients, managed services provide holistic IT solutions that can optimize their IT platforms, supplement scarce IT personnel, especially in the most sought-after areas and reduced operating costs. We continue to see an uptick in demand for our annuity services and our cloud and security advisory services. Some of our new offerings in the space include our ePlus Lifecycle Services Support. eLSS was developed to centralize and streamline the technical support experience by providing first call, multiproduct, multi-vendor architecture support for Cisco and adjacent technologies. In addition, our ePlus Azure assessments are designed to focus on high-profile security and…

Thank you, Mark, and good afternoon, everyone. I will review our financial performance in the second quarter of fiscal 2023 and year-to-date. Net sales were up 7.8% year-over-year, totaling $493.7 million in the second quarter. As Mark mentioned, we saw an expansion across the majority of our end markets and customer segments, demonstrating that we are focusing on the right growth areas. Net sales in the technology segment increased 8.1% to $471.5 million. To be more specific, product and service revenues increased 8.2% and 7.1% year-over-year to $406.3 million and $65.2 million, respectively. We were pleased with the growth in adjusted gross billings of 15.3%, amounting to $765.8 million compared to $664.1 million reported in the year ago quarter. The adjusted gross billings to net sales adjustment increased 413 basis points to 38.4% compared to 34.3% in the second quarter of fiscal 2022. As we look deeper into our end market sales in our technology segment, on a trailing 12-month basis, we see similar trends to the prior quarter with telecom, media and entertainment and technology, our largest markets, representing 29% and 16% of segment net sales, respectively. Health care, SLED and financial services accounted for 14%, 13% and 9%, respectively, with the remaining 19% representing other customer types. As of September 30, 2022, our customers totaled approximately 4,200. I just want to note that we now calculate our customer count as discrete customers who have purchased over the past 24 months rather than the prior 12 months used in previous communications due to lengthened customer buying cycles and supply chain delays. Our financing segment revenue was $22.2 million compared to $21.7 million in last year's second quarter as a result of higher proceeds from sales of leased equipment offsetting lower portfolio earnings and transactional gains. As we move to…

Thank you, Elaine. To recap, ePlus recorded a solid quarter in both business segments. With strong levels of open orders, backlog and inventory, we are well positioned to have a solid second half despite heightened economic uncertainty. In light of escalating cyber threats, our flexible and evolving security solutions are proving more critical to customers than ever. Supply chain constraints continue to be a challenge, variously affecting revenue margins and operating expenses in many of our solution areas for both product and services. We continue to monitor and adjust to fill our customers' critical IT needs. In closing, we are well positioned to capture future growth while defending against recessionary risks, given our strong balance sheet, excellent vendor and customer relationships and our talented and dedicated workforce. Operator, I would now like to turn the call over for questions.

[Operator Instructions] Your first question comes from the line of Matt Sheerin with Stifel.

Yes. Hello, everyone. Just a first question just on the strength of gross profit in the Technology segment. I think you called out higher hardware product sales because of the third-party warranty sales and the seasonality of that business. Is that right?

Yes, Matt. Our gross to net was, I think, up just about 400 basis points. So on our gross margins, there's a couple of things. One, the gross to net affected the margins in a positive way. Our product margins were actually up, too, so -- based on some of the more mission-critical technology that we sold. Where we took a little bit of a hit was on our services margins, and that really had to do with product deliveries with some of the supply chain. So it's really just a timing thing. And then the other thing I'd just highlight, if you look at it, the tech GM was up 60 basis points. And I believe we're some of the highest in the industry, where we wound up on a consolidated basis at 27% on gross margins.

Yes. No, no, I understand. What I was getting at is how sustainable is that? And how much of that is seasonal? I mean, last year, in the September quarter, you're up 400 basis points or so. So that seems like a seasonally stronger quarter. In other words, I mean, should we be modeling these levels? Or is there a seasonal decline in the December quarter because of the change of some of the products like the third-party warranties?

Now I got you, Matt. So sorry about that. So yes, it's more seasonal. So a lot of this has to do in this quarter where we get the uptick is due to Cisco's fiscal year-end where there's a lot of third-party maintenance and software that goes from a gross to net perspective. So this is traditionally a higher quarter than the other 3 quarters within ePlus.

Okay. And on the expense side, it sounds like you're making some prudent investments in various resources, particularly on the technical side. So how should we think about that going forward in terms of OpEx increasing? How should we think about that?

Yes, that's fair. So let me give you a little detail, Matt, and then maybe I'll try to help you fence it in a little bit. So from a OpEx standpoint, there's a couple of different things. The big investment is in headcount. What we're seeing, based on some of the market share that we're grabbing specifically in the services, annuity services, specifically, security and cloud, we're adding headcount in that space. For example, we hired a bunch of junior associates in the security space that we've trained over the last 5 to 6 weeks that we're then going to have be customer-facing. So we're kind of making those investments. We see the OpEx up a little bit this quarter. It kind of takes time, not only for the security folks I'd mentioned, but others to get productive. The other thing we saw was our annuity bookings were up. I think it was 36% year-over-year in terms of our annuity bookings. We had a few large service desk deals that we actually had to hire addition talent to meet the SLAs with those services. So those are some of the things that built up our OpEx. From an investment standpoint, we do think that the revenue will catch up to the expense over time. If I were modeling at a very high level, I would say this is probably a decent model in terms of from an OpEx going forward. We're going to -- we're going to diligently manage the business and add hires as needed.

So stable from here?

That's fair.

Yes. Okay. And just lastly, on the inventory build and the product constraints, it looks like you had some upside in the quarter. So it looks like you may have benefited from some improving supply or perhaps the inventory build that's been going on. But are you encouraged at all in terms of things opening up at all? And is that going to limit perhaps upside in the December quarter, where in previous years, you've been up mid- to high single digits sequentially?

Yes. So Matt, a couple of things there. One, this is still very fluid, as you know. So we're hearing different things from the OEMs in terms of timing of when things will be getting out. So it's still very fluid. So it's not an easy answer on this one. What I would tell you to look at, our open orders were up 42% over last year, for one. Second, I think Elaine touched on it. Our inventory was up 100%. I think it's up 77% since March alone. So what we're seeing is we are grabbing market share. Our adjusted gross billings continue to grow, both in the quarter as well as the half, and then some of this is a timing to get out the door. But it's positive in the long run, but it's not a simple, easy answer since we don't control when some of these things are going to get out.

Your next question comes from the line of Maggie Nolan with William Blair.

This is Jesse on for Maggie. I wanted to start off with revisiting product margins. So can you talk about some of the puts and takes there? Are you able to achieve higher pricing or those mission-critical products you mentioned? And what are your expectations going forward?

Yes. That's -- Jesse, thanks. So 2 things that affect it. One, which I talked about, was the gross to net. So having more third-party software SaaS plays that are recognized on a net and/or ratable basis depending on the technology and how the term. On the product side, yes, we've seen a little bit of an uptick on the product margins based on the technology we sell. I will remind you, if you think about it, we kind of sell more value selling services, mission-critical technology. We don't play in the PC device space as much as some of the others. We do sell in that space for some of our bigger customers, but it's not a big focus. So traditionally, we'd see our product margins be a little bit higher based on selling storage, security and some of the other technologies that get a higher gross margin.

And then a quick follow-up to that. Are you able to achieve better pricing as customers seek these solutions more quickly? And would you expect that to change as supply eases?

Well, I don't know if it'd be more quickly, Jesse. I think it's more along the lines of if we go in -- and here, I'll take a step back for you. We've kind of made our mantra as customer-first, services-led, results-driven. And what that means is we're leading with our consultative and advisory services in the hopes that we're helping our customers understand what security posture they have to put in place, what security you have to do from a ransomware or a risk mitigation and things along those lines. So normally, if you do that upfront work and you show the value, potentially, you should be able to get increased margin based on the value that you're seeing, both from a product and from a services perspective. I don't know if it's a timing thing. There may be some customers that are buying from us that have a very tight time frame and they're worried about supply chain and they're not worried about cost, but I don't think that's the driver on the gross margin for us that much.

Okay. That's helpful. And then the last -- I had one last question. So net headcount additions, they seem strong in the quarter, even when you exclude the impact from Future Com. So how are you thinking about the cadence throughout the rest of the year and implications for the business?

Yes. Good question, Jesse. So of the roughly 175 heads, approximately 25 to 30 was Future Com. The other 145, most of those were customer-facing and I'd say the majority in the services space. And when I say that, both the service desk, annuity plays that I talked about that we had to head count to meet certain SLAs for customers, and also in presales and delivery for cloud and our security practices. So we'll continue to monitor and manage that. So we'll manage the business tightly and add the headcount as we need it, as we see the net sales in AGB adjust upwards, if you will.

[Operator Instructions] At this time, there are no further questions. I would like to turn the call back over to Mr. Mark Marron for closing remarks.

Okay. Thank you. Just want to say thank you for everybody for joining us today for our Q2 call -- earnings call. I wish everybody a happy and healthy holiday season for Thanksgiving and every other holiday season that's out there between now and our next earnings call. Take care, and thanks for joining.

This concludes today's conference. You may now disconnect.