Kleyton parkhurst; Senior Vice President, Assistant Secretary; ePlus inc
Mark Marron; President, Chief Executive Officer, Director; ePlus inc
Elaine Marion; Chief Financial Officer; ePlus inc
Maggie Nolan; Analyst; William Blair & Company
Gregory Burns; Analyst; Sidoti & Company LLC
Operator
Good day, ladies and gentlemen. Welcome to the ePlus Earnings for conference call. As a reminder, this conference call is being recorded.
I would like to introduce your host for today's conference. Mr. Kleyton Parkhurst Senior Vice President. Sir, you may begin.
Kleyton parkhurst
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 other documents we might file with the SEC.
Any forward-looking statement 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 will be using certain non-GAAP measures during the call. 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?
Mark Marron
Thank you, Kley. Good afternoon, everyone and thank you for joining us. I will give a recap of our fiscal third quarter, 2025 highlights and an update on our business overall, Elaine will follow with a discussion of our financial results, and I will then conclude with an update of our current outlook.
We continue to execute on our strategic priorities of expanding our footprint and customer base and broadening our suite of solution and service offerings. As we're investing in the most promising growth areas, we continue to see the evolution of our industry transition to a more radical consumption and subscription based model which has impacted the comparability of our quarterly results. As noted last quarter, our revenue trends reflect an acceleration of gross billings recorded on a net basis as well as a move towards more ratable revenue models. Software subscriptions orders have continued to increase year over year with these deals being recognized on a net basis radially, while this evolution helped to contribute to a flat year over year revenue, we delivered solid growth in gross billings, gross profit and gross margin.
It is also a solid forward indicator for growth with our subscription orders up 51.4% year over year. Accounting for almost 46% of our open orders currently, compared to 31.7% last year and growth of over $100 million a consolidated basis. Total revenues were flat as lower product sales were partially offset by faster growing high margin service revenue, which is partially reflected in our gross profit being up 5.3%.
We believe customers are still digesting purchases from last year's inventory flush primarily impacting our networking and data center cloud sales.
The main factor though was that we had a much higher gross than net adjustment this year, which was up 840 basis points from the prior year and impacted our top line revenues by approximately $60 million.
This year over year increase in SG&A expenses was primarily due to increased head count from the Baileywick acquisition as well as investments in the business. Of note, much of the increased head count were customer facing employees adjusted EBITA decreased 15% as higher earnings in the finance segment were offset by a decrease in our technology business adjusted EBITDA.
We continue to see softer than expected hardware sales and lower demand from some enterprise customers.
As we have moved towards the services led model, our services revenues continue to grow nicely increasing 52% year on year and reaching a new high of $114 million with services gross profit up 45% year over year revenue in the quarter benefited from the acquisition of Baileywick early in the year which is integrating well and organic managed services revenue increased 28% year over year.
Our finance segment delivered another solid quarter with revenue increasing 20% primarily due to an increase in proceeds from the sale of equipment as well as higher portfolio earnings and transaction gains.
As we look at our longer term growth drivers A I is a good place to start in an E plus A I survey. 76% of it leaders have said their organizations have yet to reach A I maturity. They noted the top challenges they are facing are a skills, GAAP security concerns and cost.
There is a disparity between A I aspirations and A I readiness and most companies are in the early stages of their A I journey.
With that, we continue to build out our A I ignite and Secure gen A I programs that deliver services and solutions. Our customers need to make informed decisions.
Our Secure gen A I program is a platform developed by E plus utilizing leading A I technology from our strategic partners to deliver a secure gen A I chat bot experience. This allows customers to test use cases and convert them into actionable plans with built in guard rails. Ultimately, our secure gen A I program helps our customers more quickly make informed decisions and adopt gen A I safely.
We're also leveraging the benefits of A I internally to create efficiencies that improve customer satisfaction and we expect will provide cost savings long term with our internal use of A I. We're seeing an increase in quality due to automation and an ability to resolve inquiries and tickets faster as such. We expect that A I will help us deliver enhanced customer experiences. Security is key to customers long term road map, especially related to A I initiatives around data strategy, governance and risk. Our security offerings also continue to be a solid performer for us. Our security gross billings accounted for 21.2% of our trailing 12 months gross billings. We continue to benefit from very attractive cash flow characteristics. In turn, our balance sheet provides financial flexibility to support future growth initiatives. We will continue to be disciplined and strategic with our deployment of capital as we prioritize investing in the business to drive long term growth both organically and via M&A transactions as well as return excess cash to our shareholders.
I will now turn the call over to Elaine to discuss our financial results in more detail, Elaine.
Elaine Marion
Thank you, Mark and thank you everyone for joining us today. I will now review our financial performance for the third quarter of fiscal 2025 consolidated net sales of $511 million were modestly above the $509.1 million reported in last year's third quarter. In our technology business sales were flat year over year as the decline in product sales was more than offset by continued strength in services demand. The decline in product sales reflects a shift towards sales of third party software and services resulting in higher netted down revenues as mark mentioned as well as lower sales of product as a result of last year's supply chain easing particularly from enterprise customers notably gross billings growth of 6.6% year over year outpace net sales growth highlighting continued demand for E plus offerings and the netting down effect.
Our strategic focus on services continues to deliver results as service revenue grew 52% in the quarter with strong contribution from both professional and managed services. The professional services segment benefited from the Baileywick acquisition. While growth in the managed services segment was broad based within our technology business. Our two largest markets continue to be telecom, media and entertainment and technology representing 24 and 17% respectively of technology business net sales on a trailing 12 month basis, sled health care and financial services accounted for 1,613 and 10% respectively. With the remaining 20% from other end markets. Our financing segment posted a solid quarter with revenues of $17.8 million up 19.8% from $14.9 million in last year's third quarter due to higher proceeds from sales of equipment and portfolio earnings, consolidated gross profit grew 5.3% faster than our revenue growth to 140.9 million. Representing a consolidated growth margin of 27.6%. Up from 26.3% in the prior year.
The 130 basis point expansion was primarily driven by higher product margins which benefited from a shift in mix to third party maintenance and subscriptions. While product margins were higher than last year, a higher proportion of product sales to certain enterprise customers at lower overall margins weighed on product margins. But this was offset by contribution from the netting effect. I've mentioned professional services growth margin declined to 40.1% from 43.3% due to a shift in mix of services provided. While managed services gross margin declined to 29.8% from 31.8%.
Consolidated operating expenses increased 17.3% year over year to $112.4 million. Primarily reflecting increased head count due to the Baileywick and peak resource acquisitions as well as continued investments in our business to support our growth. Our head count at the end of the quarter increased to 2,291 from 1,897 a year ago. Primarily reflecting additions of customer facing professionals acquired in the Baileywick transaction.
Operating income was $28.5 million down from $38 million and earnings before taxes declined to $32.2 million from $38.4 million in the prior year quarter.
During the third quarter, we realized interest income of $1.8 million and foreign exchange gains of $1.9 million resulting in other income of $3.7 million. Our effective tax rate was 25% versus 29% a year ago due to lower state taxes.
Third quarter, consolidated net earnings were $24.1 million or 0.91 per share. Down from net earnings of $27.3 million or a dollar two per share. In last year's third quarter, nongaap diluted earnings came in at a dollar six per share compared to a dollar 18 per share last year. Our diluted share count at the end of the quarter was $26.6 million compared to $26.7 million in the prior year. Third quarter, consolidated adjusted EBITA amounted to $39.2 million versus $46.2 million in the third quarter of fiscal '24 for the nine months ended December 31st 2024. Our consolidated net sales totaled $1.57 billion down from $1.67 billion in the prior year. The decrease primarily reflects lower product sales in the technology business, partially offset by growth in services and stronger performance in our financing segment, technology business, net sales were $1.52 billion year-to-date compared to $1.63 billion last year.
Despite the decline in net sales, gross billings in the technology business were essentially flat year over year. At 2.49 billion year-to-date. Consolidated gross profit rose 0.7% to 423.4 million. While gross margin rose 180 basis points to 27%.
Gross margin. Expansion was driven by higher product margins which benefited from an increase in netted down revenues partially offset by lower upfront margins for the nine months ended December 31st 2024 consolidated net earnings were $82.8 million or 3.10 per diluted share compared to $93.8 million or $3.52 per diluted share in the comparable period last year. And non-GAAP earnings per share were $3.56 versus $3.99 adjusted EBITA was $134.4 million. Down from $153.6 million in the comparable period. Last year, we ended the quarter with cash and cash equivalents of $253.1 million. Consistent with the balance at the close of fiscal 2024 operating cash flow for the first nine months was $141.2 million compared to $143.5 million last year. And included cash used to fund working capital. The Baileywick acquisition and share repurchases. We ended the quarter with $99 million in inventory down from $139.7 million. At the end of fiscal 2024 inventory turns were 13 days down significantly from 27 days in the third quarter of fiscal 2024. As a result, our cash conversion cycle improved to 32 days down meaningfully from 54 days in the prior year.
During the first nine months of the year, we repurchased approximately 380,000 shares under our repurchase plan at a cost of $30 million.
Our strategy continues to focus on our core priorities, driving organic growth, expanding through a creative acquisitions and returning capital to shareholders through our repurchase program. With that, I will turn the call back over to Mark Mark.
Mark Marron
Thank you, Elaine. We are investing both organically and inorganically to develop a portfolio that provides us with multiple levers for growth across a broad range of verticals to drive growth and diversification growth of our gross profit and services are key indicators of the success of our go to market plans and being a trusted adviser for our customers. Our recent results reflect both the fast growth of our services led business model and the accelerating shift towards ratable subscription and as a service revenue recognition models, this has resulted in mixed results for the quarter and we will continue to adapt and adjust as the market transitions as a result. We're adjusting our fiscal 2025 financial outlook.
Turning to guidance, we now forecast revenue range of $2.07 billion to $2.11 billion for fiscal year 2025 and an adjusted even a range of $165 million to $171 million. Our guidance reflects higher gross to net adjustments than previously expected and also factors in the near term potential of tariffs and how this might affect short term decisions. We will continue to monitor this closely and expect to share more insight at the time of our year end conference call.
We are making investments in the business focusing on high growth areas where we seek the best return opportunities and we are confident this will support our commitment to growth in 2025 and beyond our balance sheet and financial condition are healthy, which gives us a solid foundation for expansion. In conclusion, we remain confident in the growth opportunities for our business moving forward and our ability to execute operator. Please open the line for questions.
Operator
Thank you, ladies and gentlemen. We will now begin our question and answer session. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Your first question comes from the line of Maggie Nolan with William Blair. Please go ahead.
Maggie Nolan
Hi, thank you. Can you talk a little bit about your expectations for product sales that are included in the guide and, and maybe a couple of quarters beyond that.
Mark Marron
Sorry, Maggie, did you say, we didn't hear your expectation for product sales in the quarter and then going forward or.
Maggie Nolan
The, yeah, the fiscal fourth quarter and, and if you can go a couple quarters beyond that kind of flush out the, trends you're seeing, given that it's been a weak spot.
Mark Marron
Yeah, it, it's, it's actually, I think we noted it on the last earnings call as well. Maggie that there's a softening in the market around some of the hardware or product demands. If you will, we specifically saw it with some select enterprise accounts in this quarter. We would expect it to continue into next quarter. The other things that affected our, I'll say bottom line, not so much top line, was some of the upfront gross margins on product sales. That was more of an anomaly, but that was offset by the netted down revenues. The other interesting thing in play here, Maggie is the market is really changing. The O EMS are going more to, as a service consumption subscription model. So they're recognized on a net and ratable basis. I think you may have seen our netted down revenues, product sales were actually affected by 840 basis points. To put that in perspective, that's about $60 million in net sales. That would have went to our top line if it were flat to last year.
So it's a, it's a moving target. I would expect that they continue to be a soft demand for Q4 and then would expect it to start to pick up a little bit as we move into our Q1.
Maggie Nolan
So on that last point mark, I mean, we, we've talked about the shift toward netted on product revenues.
Are you calling an acceleration? Do you have an idea of maybe what might be driving that trends to accelerate at this moment in time?
Mark Marron
Yeah, we've seen a couple different things, Maggie one. I, we still don't know if it's a new trend. If you look at just the last two quarters, last quarters are netted down revenues for product sales was affected by 940 basis points. This quarter was 840 basis points. That's significantly higher than last year and higher than what we were projecting in the beginning of the year. So there is, there is that play, what's really happening here is the O EMS are changing how, how they're going to market. We're as we sell more software that subscription normally recognized on a net or maybe an annual basis. So it's really the product mix and solutions that we're selling that's affecting us right now.
Maggie Nolan
Okay, thank you.
Mark Marron
No problem. Good hearing from you, Maggie. We'll talk to you soon.
Operator
Your next question comes from the line of Greg Burns with Sidoti. Please go ahead.
Gregory Burns
Good afternoon. So I just wanted to talk, I guess a little bit more about the demand environment. I know you've been kind of calling out this digestion of some of the product that's in the channel from the supply chain kind of improving over the last year.
That seems to be lingering longer than, probably we would have expected. So, or is there anything else going on? Are you, what are you hearing from your, your customers? Like, is it beyond that this point? Is there other things driving, the soft demand or is it really just kind of this digestion of, of product in the channel?
Mark Marron
Yeah, it's, it's the digestion, Greg. We can see it specifically in the networking space and a few select enterprise customers. So, it is around supply chain for the most part. There are things going on overall in the industry, I think, as you know, with tariffs and doge and everything else that's going on, I do think the election actually slowed things down a little bit for us in the beginning of the quarter. We did see our billings were flat to down in the October November time frame and picked up in December. But we didn't pick up a lot of what I call the year end flush or what we normally expect in this quarter. So I those are still the cases there. We still from a, I'll say a customer set standpoint, both both sides and by vertical. We're pretty diversified. In fact, we've actually diversified more with the Bailiwick acquisition with some of their customers or expanded the verticals we were in some cases, so we feel somewhat protected long term, but there are some things going on that are affecting decisions right now.
Gregory Burns
Okay. And then in terms of this ongoing shift towards more software subscription ratable models, can you just talk about like what the value proposition for a for a bar is in that, in that type of model? Is there an increased risk of maybe this intermediation over time if can they go more easily direct to, to our customers? And with that model.
Mark Marron
No, no, Greg. In fact, it's actually an opportunity for us to build up our services. So in a lot of cases with the subscription, there's add on services, there's renewals, there's what they call life cycle management. So you try to get them to adopt the technology or software if you will up sell additional features and an incremental services, maybe provide some type of you know, staffing and or managed service. So, no, it's not, it's no different in terms of with the subscription versus hardware. I believe that would affect the channel.
Okay, great. Thank you.
No problem.
Thanks Greg.
Operator
As there are no further questions at this time, I would like to turn the call back over to Mr Mark Marin for closing remarks.
Mark Marron
All right. Thank you everybody. And look, I will read it. We still feel very strongly about our strategy and our focus areas that we're in. We're going to continue to build out our services led model. Our services were up 52%. There were approximately 23% of our net sales this quarter. We'll continue to leverage our customer base and cus customer segments. Our strong balance sheet gives us flexibility to make inorganic and organic moves. So we feel good where we're positioned and we've been in business for a long time. So we will adapt and adjust to this new norm, short term and be able to, to, to make the moves that we need to make. So I want to thank everybody for joining us today and look forward to seeing or hearing you on the next call. Thank you.
Operator
That concludes today's meeting. Thank you for your participation. You may now discuss.
