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ePlus Sales Steady While Margins Rise With Shift To Services, Recurring Revenue Opportunities

A large low-margin deal lasting much of fiscal 2018 dragged on revenue, but it, and other new deals, opened the door to more higher-margin opportunities for solution provider ePlus.

A new focus on services and recurring revenue is having a big impact on the business of ePlus, a large national solution provider that reported its fiscal fourth quarter and full year 2018 financials on Thursday.

The Herndon, Va.-based solution provider reported improved full year and fourth quarter gross margins and non-GAAP earnings on relatively flat revenue, a combination that company CEO and President Mark Marron called evidence that ePlus is executing well.

"This [gross margin] growth demonstrates the benefit of our investments in delivering high value-added services and developing complex solutions for our clients, as well as the success of our land-and-expand strategy which gets us in the door with large enterprise customers," Marron said.

[Related: Solution Providers Start 2018 With Growth Plans Following Steady Revenue, Earnings Gains]

Marron, in his prepared remarks during the company's quarterly financial analyst call, also said that ePlus is seeing strong growth in its services and annuities business and in its security sales and related services. Security sales and services revenue rose 47.9 percent in the fourth fiscal quarter over last year's fourth quarter, and grew 23.8 percent for all of fiscal 2018 to represent 18.9 percent of total adjusted gross billings, he said.

ePlus also made progress in adjusting its resources, including headcount, by moving a large number of employees to areas of high customer demand, Marron said. "We believe we are well-positioned in the face of rapid changes in the industry," he said.

ePlus will increase its business focus in a couple of key areas, including cloud, security, and digital infrastructure, Marron said. He also expects an increasing business in subscription services to play a role in future growth.

The company did see some revenue pressure as its business moved in part from product and services sales to recurring revenue opportunities, Marron said. However, he said that shift is good news for the future of the company.

"Importantly, the solution subscription model can give us several years of visibility, giving us annuity-quality revenue and the potential to upsell additional services," he said. "Similarly, our gross margins on these sales are generally higher, only recognized over a longer period."

For the fourth fiscal 2018 quarter, which ended March 31, ePlus reported revenue of $330.4 million, down slightly from the $332.8 million the company reported in the fourth fiscal 2017 quarter.

Full fiscal year 2018 revenue was reported at $1.4 billion, up slightly from last year's $1.4 billion.

Elaine Marion, ePlus CFO, said the relatively stable revenue growth was due mainly to a single contract.

"We faced a tough revenue comparison particularly relating to a large competitively-priced project that we began delivering largely in the fourth quarter of fiscal 2017 and substantially completed in the third quarter of fiscal 2018," Marion said. "These types of projects enable us to further penetrate large enterprise customers and upsell additional services, building the potential for gross profit growth and margin expansion in future periods."

About 24 percent of ePlus' revenue came from technology sales, compared to 17 percent from state and local government and education, 15 percent from financial services, 14 percent from telecom and media and entertainment, 14 percent from healthcare, and 16 percent from other smaller areas, Marion said.

ePlus reported GAAP net earnings of $18.1 million, or 65 cents per share, in the fourth fiscal 2016 quarter. On a non-GAAP basis, net earnings was reported at $13.2 million, or 96 cents per share, up from $12.7 million, or 91 cents per share.

For all of fiscal 2018, ePlus reported GAAP net income of $83.9 million, or $3.95 per share, compared to 2017's income of $86.1 million, or $3.60 per share.

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