EPLUS INC Q3 FY2025 earnings call

• Continued execution on strategic priorities of expanding footprint, customer base, and service offerings.
• Industry transition to ratable consumption and subscription-based model impacting quarterly results; software subscriptions orders up 51.4% year-over-year, accounting for nearly 46% of open orders.
• Total revenues flat due to lower product sales offset by faster-growing high-margin service revenue; gross profit up 5.3%.
• Higher gross to net adjustment this year impacted top line by ~$60 million; SG&A expenses increased due to Bailiwick acquisition headcount and business investments.
• Adjusted EBITDA decreased 15% due to higher Finance segment earnings offset by technology business decline.
• Services revenues grew 52% to $114 million, with organic managed services up 28%; finance segment revenue up 20%.
• AI initiatives: 76% of IT leaders yet to reach AI maturity; ePlus building AI Ignite and Secure GenAI programs.
• Security offerings solid performer, with security gross billings 21.2% of trailing 12 months gross billings.

For the technology business, sales were flat year-over-year with a decline in product sales offset by strength in services demand. Gross billings growth of 6.6% outpaced net sales growth. The financing segment posted revenues of $17.8 million, up 19.8% from the prior year quarter due to higher proceeds from equipment sales and portfolio earnings. Consolidated net sales were $511 million, modestly above the prior year's $509.1 million. Consolidated gross profit grew 5.3% to $140.9 million, with a consolidated gross margin of 27.6%.

• Forecast revenue range for fiscal 2025: $2.07 billion to $2.11 billion.
• Forecast adjusted EBITDA range: $165 million to $171 million.
• Guidance reflects higher gross to net adjustments than expected and factors in near-term potential of tariffs.

• Market softness affecting hardware/product sales, particularly in networking and some enterprise customers.
• Higher gross to net adjustment impacting top line revenues.
• Industry factors like tariffs and election impact affecting customer decisions.

Q: Can you talk about expectations for product sales in the fiscal fourth quarter and beyond given it's been a weak spot?

A: Softening in hardware/product demand continues into Q4, expected to start picking up in Q1; market shift to as-a-service consumption subscription model affecting product sales mix.

Q: What's driving the shift towards netted down product revenues and is there an acceleration?

A: OEMs moving to as-a-service consumption subscription model, leading to higher netted down revenues; seen as a moving target with product mix and solutions affecting this trend.

Q: About the demand environment, is soft demand beyond supply chain digestion?

A: Soft demand is primarily due to supply chain digestion, with some industry factors like tariffs and election impact; customer base is diversified, but some factors affect current decisions.

Q: Value proposition for VARs in software subscription ratable models and risk of disintermediation?

A: Subscription model offers opportunities for VARs with add-on services, renewals, and life cycle management; not a disintermediation risk as it allows building services and upselling.