EPlus Posts Strong Q3 Results Thanks to Focusing on High-Margin Solutions
EPlus recently posted their financial results for the first quarter of their fiscal year. Thus, EPlus posted EPS for Q1 of $1.14, which is $0.09 higher than analysts estimated. The company generated $272.3 million in revenues, which was higher by $7.1 million than analysts’ expectations. This is the outcome of the technology sector generating results that were better than expectations, showing a 6 percent increase on a year over year basis, which was driven by a high level of demand from EPlus’ midmarket and large commercial clients as well as the traction they continue to enjoy with local and state agencies. As was to be expected, the company’s continuous focus on expanding their services segment is not only generating them a greater degree of visibility for the top line, thanks to revenue streams that are recurring, but is also helping to grow their gross margin, which is already significantly higher than their peer group.
For the quarter ending in June, the company showed they achieved a gross margin of 20.7 percent, which was higher by 140 basis points than analysts were expecting. Thus, analysts feel that EPlus is in a good position to keep seeing the growth of their margin as services expand and become a more significant part of overall revenues. The company is continuing their investment in customer-facing sales and service capacities, with their headcount going up by 5 percent on a year over year basis. However, the move towards products and services with higher margins is more than counterbalancing the rise in operating costs as proven by the 11 percent growth of the company’s operating income, compared to the 5 percent increase in revenues on a year over year basis. While the company doesn’t offer annual guidance or quarterly guidance, the company’s management did say they expected EPlus to achieve a growth rate that is faster than the general IT services sector, which is expected to see growth of 4 percent per year. However, taking into account how lumpy the reseller business can be, analysts are still rather conservative in regards to future predictions.
The commentary regarding the demand climate was positive and analysts feel the company’s growing workforce is indicative that the top line will see accelerated growth. Analysts believe that EPlus’ decision to transform into an IT solutions firm is helping it to achieve faster growth rates than their peers because clients want to work with IT partners that have expertise in high-end sectors of the market, such as cloud, mobility and security, but that also can provide complete solutions, including design, architecture, software, hardware, integration, implementation, management, hosting and financing, throughout the complete IT life cycle.
As the company keeps expanding their client-facing service and sales employees, analysts feel EPlus is in a good position to steal market share from their rivals, as well as growing their penetration with current clients. The stock recently closed at $56.45 per share, which means shares are trading at 5.2 times the enterprise value to EBITDA figure, indicating a 42 percent discount over the IT service peer group and a 31 percent discount versus a more blended peer group, which would include IT distributors as well as IT service companies. As EPlus continues to move towards offering more services with plenty of value, analysts are expecting that the company will expand significantly if the higher gross margins and the increased visibility of the operating model are to be taken into account. Thus, analysts are sticking to their rating of outperform for the company.