EPlus: Focus on Margin-Rich Solutions Drives Strong First-Quarter Results

EPlus reported first-quarter EPS of $1.14, $0.09 above our estimate. Revenue of $272.3 million was $7.1 million above our estimate, with better-than-expected results in the technology segment (up 6% annually) driven by strong demand from the company’s large and midmarket commercial customers as well as continued traction with state and local agencies. As expected, ePlus’s continued focus on growing its services business is not only providing more visibility on the top line (in the form of recurring revenue streams), but also expanding the company’s gross margin, which is already well above the peer group.

For the June quarter, the company reported gross margin of 20.7%, beating our estimate by 140 basis points, and we believe the company is positioned to continue experiencing margin expansion as services become a larger percentage of total revenue. The company continues to invest in its client-facing sales and services capabilities (headcount increased 5% year-over-year); however, the trend toward higher-margin products and services is more than offsetting the increase in operating expenses as evidenced by the 11% year-over-year increase in operating income (compared with the 5% year-over-year increase in revenue). While the company does not provide quarterly or annual guidance, management highlighted its expectation for ePlus to grow at a faster pace than the overall IT services market (which is expected to grow around 4% annually)—still, given the lumpiness of some of the reseller business, we maintain our conservative stance on forward estimates.

Demand environment commentary was positive, and we view the company’s expanding workforce as a potential indicator for accelerating top-line growth. We believe the company’s decision to transition to an IT solutions company is enabling it to grow faster than its peers as customers are increasingly looking for an IT partner that has expertise in high-end segments of the market (such as mobility, cloud, and security) as well as the ability to provide end-to-end solutions (architecture, design, hardware, software, implementation, integration, financing, hosting, and management) throughout the entire IT life cycle.

As the company continues to add customer-facing sales and service employees, we believe ePlus is well positioned to gain share from competitors while also increasing its presence at existing customers. Based on Tuesday’s closing price of $56.45, the stock trades at 5.2 times on an enterprisevalue- to-EBITDA basis, reflecting a 42% discount to the IT services peer group and a 31% discount to the blended peer group that includes both IT services companies and IT distributors. As ePlus continues its transition toward more value-added services, we expect to see multiple expansion based on increasing gross margins and the added visibility in the operating model. We maintain our Outperform rating.


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