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; Darren Raiguel, COO and President of ePlus Technology; 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 most recent annual report on Form 10-K, quarterly reports on Form 10-Q, and in other documents we filed with the SEC. And the forward-looking statements speaks only as of the date of which the statement is made and the company undertakes no responsibility to update any of these forward-looking statements in light of new information, future events, or otherwise. In addition, we'll be using certain non-GAAP measures during the call, that 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 third quarter of fiscal 2023. This was a strong financial and operational quarter for ePlus. We continue to successfully execute on our growth strategy to deliver IT solutions focused on digital transformation, hybrid workforce plans, security, and cloud. With broad-based growth across all customer size segments and vertical markets, we believe we are gaining market share, aided by the breadth of our solutions across the technology stack. The strength of our third quarter results also reflected fulfillment of several enterprise customers large projects due in part to some relief in the supply chain. The investments we have made in our teams and in our capabilities are driving growth and delivering value to our customers. Consolidated net sales increased 26% and our adjusted gross billings increased 29.7% with particularly strong growth in our Technology segment. We are continuing to generate operating leverage, driven by strong topline growth and balanced SG&A management, which has supported our expanded solution offerings. Our net earnings increased 35.1% to $35.7 million and diluted EPS increased 36.7% and both above our revenue growth rate as our focus on operational efficiency continues. As our customers continue to invest in upgrading their IT systems to accommodate remote and hybrid work, ePlus is well-positioned to provide integrated and flexible workplace transformational systems. Our offerings include multi-vendor architecture support, vendor life cycle management, and on-premises data center infrastructure provided in an as-a-service model, such as our Storage-as-a-Service solution. With our customers transitioning more of these processes and workloads to the cloud, they increasingly look to ePlus to develop more strategic security roadmaps and build more sophisticated and more comprehensive security solutions to protect these new virtual workplace environments. As a result, our security…

Thank you, Mark, and good afternoon, everyone. Our third quarter fiscal 2023 results reflected solid execution by the ePlus team and the continued success of our strategy focused on capturing opportunities in high-growth end markets. Third quarter consolidated net sales increased 26% year-over-year to $623.5 million. Technology segment net sales rose 28.3% to $611.8 million, driven by 31% growth in product revenue and 7.9% growth in services revenue. Adjusted gross billings were $888.6 million, up 29.7% compared to $685 million in the year ago quarter. The adjusted gross billings to net sales adjustment increased to 31.2% and compared to 30.4% in the third quarter of fiscal 2022. Our end market mix on a trailing 12-month basis remained consistent with previous periods. Our two largest markets, telecom, media and entertainment and technology represented 28% and 18% of technology segment net sales, respectively. Health care, SLED and financial services accounted for 14%, 13% and 9%, respectively, with the remaining 18% from other end markets. As Mark mentioned, due to a decline in proceeds from leased equipment sales year-to-year, our financing segment revenue totaled $11.7 million compared to $17.9 million in last year's third quarter. Consolidated gross profit increased 18.1% to $138.4 million, and gross margin was 22.2% compared to 23.7% in the previous year's quarter. Within our Technology segment, gross profit increased by 22.4% to $127.9 million. Technology segment gross margin was 20.9% compared to 21.9% in the year-ago quarter. The decrease in gross margin was due to increased costs for managed services as well as several large competitively priced project-related contracts that blended down our services margin. Product gross margin of 19.2% was stable compared to 19.3% in the last year's third quarter. Financing segment gross profit declined 16.7% to $10.5 million, mainly due to decreased sales of leased equipment, partially…

To recap, this was a strong quarter for ePlus with broad-based demand across all of our customer size segments and vertical end markets. By targeting faster-growing end markets with a comprehensive suite of integrated solutions, we continue to bolster our competitive position and capture incremental market share, supported by our strong balance sheet, expensive industry partnerships and talented team, ePlus remains well positioned for continued long-term growth, and we remain cautiously optimistic despite the uncertain economic environment. Operator, I'd now like to open the call for questions.

[Operator Instructions] Our first question will come from the line of Maggie Nolan with William Blair. Please go ahead.

Hi. Thank you. You mentioned the fulfillment of -- for projects for several large enterprise customers in the quarter. Can you give us a little more detail on what types of projects or solutions these were and an idea of maybe the magnitude of that or how we might expect that to impact financial results sequentially?

Sure. Hey, Maggie, how are you? So a couple of different things there, if I could. I'll touch on why the quarter was up so nicely overall, and then try to work in the deals. So first off, we had a really strong tech quarter both from top line to bottom line. All our customer size segments and verticals were up nicely. Security continues to grow. Some of the focus we put on the mid and enterprise counts grew nicely for us in this quarter. And that's where we're talking about land and expand. We have a few really nice deals in the security, in the data center cloud and in the services space with nice-sized deals with decent margins. Now with that said, some of the things that also added to this quarter that were positives. We saw some easing of the supply chain. So we did see some movement in the supply chain. And I think you may have noticed our open orders are down 5% sequentially, and that's by design, trying to bring that in line. It's still above historical levels. Our inventory was down 30 million sequentially by design, trying to get product out the door, the land and expand deals as you talked about, and then just some year-end budget. But some of the land and expand are with some of your big mid to enterprise customers across, as I said, data center cloud, security and service opportunities.

That's great. And any thoughts about how we should consider the impact of that sequentially or on a year-over-year basis for next year?

Okay. Yes. In terms of Q4, if I had to look at it, Q4 is traditionally one of our smaller quarters, Q2, Q3 are bigger quarters. We still have a lot of the supply chain, and it's fluctuating by vendor and by solution area, Maggie. So it's literally moving in and out as we go forward. If I look at Q4 sequentially, it would be down. Finance is going to be a really tough compare for us. We had some early buyouts last year. So I think finance will be a tough compare -- and then the -- if I look at the supply chain, I don't know if we'll get as much relief as we did with some of the focus we put on this quarter.

Just a follow-up on that last comment with respect to supply chain constraints. How might that affect the results when you're considering performance for the next fiscal year or fiscal 2024?

That's a tough variable, as you know, Maggie, that I think everybody is kind of struggling with. These times are moving -- the lead times are moving in and out by vendor -- there are some that are starting to loosen up. We saw networking actually loosened up. So we actually had a nice quarter with -- in the networking section of our business. I do expect that this will continue for a couple of quarters. One of the things that, I guess, a benefit for us as it relates to supply chain, we're not really in the laptop, PC business. So some of the decline that some of the folks are seeing in that space were not going to be affected by -- but for the fiscal year, I think we'll still have the supply chain issues that we've been dealing with over the last year or so.

Okay. Thanks, Mark.

Thanks, Maggie. We'll see you soon.

Your next question will come from the line of Matt Sheerin with Stifel. Please go ahead.

Yes. Thank you. Good afternoon, everyone. Just a follow-up question regarding the strength that you had in the quarter, a lot higher than consensus. And I think higher than although you didn't give guidance certainly higher than you had indicated on the last call. It sounds like demand was good. It sounds like supply opened up. But was there some pull-in where orders that you because of are loosening supply in your own inventory, were you able to fulfill backlog faster than expected? In other words, pulled some sales into this quarter or the December quarter?

Yes, Matt, I think there's probably a little pull through. I wouldn't say significant, though. So if you look at it, as I touched on, the back -- the open orders are down 5% sequentially. So there's some there. The inventory is down by $30 million. We've put a very focused effort on getting equipment out the door as soon as we get it. So there's definitely some potential pull through, not dramatic though, to be honest. So, I think we benefited that in the quarter due to some supply chain things that we saw came in a little quicker than we thought. And also, some of the land and expand deals also help with some of the growth that you saw. I don't know if I pulled it out on my piece, but our tech net sales were up almost 28 in change percent. So we saw a really nice quarter in tech across all verticals and customer sizes. And we'd like to think that's by design.

And these land and expand deals. So we're talking about, what multimillion dollar orders that you were able to fill perhaps at a discount or at least fulfill orders more efficiently than competitors and then you were giving up some price there because your gross margin was down pretty significantly quarter-on-quarter.

Yes. So Matt, I can't comment on the competitors, since I'm not watching their business. What I'd tell you, yes, these are large multimillion dollar deals. As we've always said, we're really focused on the mid to enterprise. We don't play in the small to medium -- in the small size segment of customer base, if you will. So these are larger deals that require a lot of work upfront advisory services that then lead to these multimillion dollar deals that traditionally, the margins are a little tighter because it's competitive upfront. So the margins are a little bit down. The other thing that contributed to our gross margins being down, our service margins were down a little bit. So that's -- those are the two pieces that affected the gross margins.

Okay. And you said that the open orders were down sequentially. Was your backlog down? And how does that compare to your backlog to sort of normal levels? I know it's been well above normal levels.

Yes. Backlog was actually up, Matt.

Your backlog is up. Okay.

Yeah.

What are some of the -- what are the product constrained areas that you're still seeing? Because we're hearing from some distributors and suppliers that networking demand -- I mean, orders and supply seems to be improving, but you're not seeing that across the board?

Yes. We're not seeing it across the board. The networking has got the longest lead times and it's improving some, but that's probably the biggest piece from a, I'll say, supply chain and lead time standpoint, Matt.

Okay. Okay. Thank you.

All right, Matt. Talk to you soon.

[Operator Instructions] Your next question will come from the line of Greg Burns with Sidoti & Company. Please go ahead.

Good afternoon. So just to start off with some of the strength you saw in the quarter. So, I guess, the upside, I guess, relative to consensus, or maybe your internal expectations was mainly driven by demand. It was more weighted towards just market demand as opposed to dipping into your open orders?

Well, no, Greg, I'd actually say it's a combination of the two. So when I looked at the quarter, once again, if you -- I'll just go by customer size segments in the mid to enterprise. We actually grew very nicely. And that's by design with some of our account planning and some of the things that we're trying to do there. I think I mentioned it on to Matt or Maggie as well as our tech segment had a very strong quarter, where the net sales for tech were actually up 28.3% overall. So I think it was by design on some of that, but there was also some supply chain easing with the open orders going down 5%. And in terms of the inventory going down $30 million, so there was a real focus internally to try to get the product out as soon as we got it in, get it out the door. So it's a little bit of supply chain easing plus a nice quarter by the team.

Okay. Is it like 1:1, the $30 million decline of inventory that turns into revenue, or how should we think about the magnitude of what's left on the balance sheet in terms of open orders -- in terms of revenue potential?

Yeah, yeah. On the inventory, it would be at 1:1 on the inventory. But on the overall sales, that's a small percentage, as you can imagine, Greg, with our numbers. So yeah, it's a 1:1 on the inventory, for sure.

Okay. And then the OpEx level this quarter, is that a good way to model going forward, or is there any other puts and takes why it might increase or decrease from here?

Yeah. I think there's a couple of things there. I think the overall level is good on the OpEx. I think there will obviously be some movement based on a smaller quarter in terms of revenue in GP based on Q3 being our largest quarter-to-date so far. So that will be the variable from an OpEx. It will be in that range overall less that difference, if you will, Greg. But realize we are watching it pretty closely. So we're watching the market. And with all the economic uncertainties, if you think about all the different tech layoffs, we're watching very closely, and we're going to adjust accordingly. Actually, I look at the tech layoffs it’s potentially an opportunity for us. It sounds a little bit crazy with everything going on. But I think with the solutions and skill sets we have, we might be able to pick up some of those opportunities. But when you look at Gartner projecting 2.4% IT spend and stuff like that. We're watching it and managing it very closely in terms of the OpEx. It actually, overall, our OpEx as a percentage of GP and AGB actually went in the right direction this quarter for sure, Greg.

Okay. And then to your point about the tech layoffs, we are seeing some more cautious commentary in the industry. Are you seeing anything in terms of maybe customer decision cycles, sales cycles extending, or anything that you see that would maybe give you some more caution going forward?

Yes, there's definitely some caution in ePlus, Greg. I mean as you know, there's always challenges and opportunities in this kind of market. But I do see some budget tightening. Some are the sales cycles getting a little bit longer, especially with some of the bigger customers. So there's definitely some of that going on as the economic uncertainties, kind of, stay out there. So yes, the sales cycles are longer for sure.

Okay. And then lastly, you launched a new service, storage as a service. Pure Storage. Can you just talk about how that works? Are you just reselling it? Are you actually providing service? And when you launch something like that, is it market driven? Like have you been -- is it something that your customers have been asking you to do, or is it just something net new that you see as an opportunity?

Hi, Greg, it's Darren. What I'll say is we've been selling Pure as a Service, which is their offering for years now, when we saw for our customers as they were looking for a more customized approach that we know their environment. We know the other components of their data center and their cloud play. So this ePlus Storage as a Service is powered by pure currently, and we're looking at all the storage potential, where we're providing additional services, taking calls, engaging our managed services centers to provide additional value-add helping the customers with sizing, future investments and consumption over time as opposed to having to buy it all upfront. So its a really nice play where we saw customers demanding it, and the team is really excited about the customers that are reaching out now with that recent announcement. So more to come.

Okay. Great. Sounds good. Thanks.

All right. Thanks, Greg.

We have no further questions at this time. I'll turn the conference back over to management for any concluding remarks.

All right. Thanks, Regina, and thanks, everybody for joining us for our Q3 2023 conference call. We look forward to speaking with you in Q4. Thanks, and have a good day.

Ladies and gentlemen, that does conclude today's meeting. Thank you all for joining.