Correspondence 0001022408-23-000020 from EPLUS INC (PLUS) (CIK 0001022408) (PLUS)
EPLUS INC (PLUS) (CIK 0001022408)
Date: May 24, 2023 · CIK: 0001022408 · Accession: 0001022408-23-000020
AI Filing Summary & Sentiment
File numbers found in text: 001-34167
Referenced dates: April 21, 2023, May 15, 2023
Letter
VIA EDGAR Office of Trade and Corporate Services Division of Corporation Finance Securities and Exchange Commission Attention: Ms. Nasreen Mohammed Re: ePlus inc. Form 10-K for the fiscal year ended March 31, 2022 Filed May 26, 2022 File No. 001-34167
Dear Staff:
This letter is submitted by ePlus inc. (the "Company") in response to the further comments from the staff (“Staff”) of the Division of Corporation Finance of the Securities and Exchange Commission dated May 15, 2023, with respect to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2022 (the "Form 10-K"). This response letter supplements our prior responses provided to the Staff in our letter dated April 21, 2023 (the “April 21 Response Letter”).
For your reference, the text of the comments contained in your May 15, 2023, letter have been reproduced below in bold text, followed by the Company's responses.
Key Business Metrics, page 28
1. We note your response to comment one, including your plan to present gross billings as a metric rather than a non-GAAP financial measure. Please revise your definition to explain that gross billings includes the gross transaction values for certain sales transactions that you recognize on a net basis and, therefore, includes amounts that will not be recognized as revenue.
RESPONSE: In response to the above comment, in future filings, beginning with our Form 10-K for the fiscal year ended March 31, 2023, to be filed today, the Company will include the following definition of how gross billings as an operational metric is determined:
ePlus inc. 13595 Dulles Technology Drive Herndon, VA 20171 (703) 984-8400 www.eplus.com
Gross billings are the total dollar value of customer purchases of goods and services including shipping charges during the period, net of customer returns and credit memos, sales, or other taxes. Gross billings include the transaction values for certain sales transactions that are recognized on a net basis, and, therefore, includes amounts that will not be recognized as revenue.
Management’s Discussion and Analysis
Financial Summary, page 31
2. We note your response to comment two. While you quantify sales by customer end market and vendor for the technology segment and appear to focus on such in your disclosure, your narrative does not appear to explain "why" changes occurred other than what appears to be a more general reference to buying cycles and timing of IT initiatives. We note from your fourth quarter earnings call that you experienced strong growth trends in your services business, which includes a wide range of professional and managed services, staffing, logistics and help desk services. However, your proposed revised disclosure does not speak to this factor. We also note from the call that "annuity quality" services tend to have higher margins and more predictable financial performance, which you consider a positive trend. Finally, we note from the call that product gross margin increased 20 basis points to 22.8%, while service gross margin decreased 390 basis points to 35.3%, reflecting lower professional service margins due to higher costs. Therefore, we continue to believe you should attempt to further discuss the key drivers of changes in your results in a way you believe will allow investors to best understand the business as seen through the eyes of management. Additionally, we note from your response that you experienced price inflation on purchases of products which are resold. Please expand your discussion to identify if inflation was a contributing factor in recording higher product revenues and clarify the resulting impact, if quantifiable.
RESPONSE: In future filings, beginning with our Form 10-K for the fiscal year ended March 31, 2023, to be filed today, the Company will further update its disclosure within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations to address several of the Staff’s suggestions regarding expanded narrative disclosure.
Buying Cycles and Timing of IT Initiatives
With respect to the first point raised by the Staff to provide further explanation of why changes occurred in sales in the Technology segment, we respectfully advise the Staff that the changes we reported in our net sales within our Technology segment are primarily due to changes that we experience in customer demand that occur due to regular buying cycles as customers have their scheduled purchases of equipment and services to maintain their IT systems, as well as specific IT projects that are initiated by our customers based on their own business and operational needs.
Management believes it is important for both the Company and investors to understand the demand by customer industry and as such will continue to include a breakdown of the net sales by customer industry. Further, to align our disclosures in our filings with comments from management in earnings calls and other communications, we will replace the breakdown of net sales by manufacturer in our disaggregation of revenue disclosure within the segment footnote with a breakdown of net sales by type of product.
Technology Service Revenue
In response to the Staff’s comment, we have updated the narrative disclosure for net sales for the full fiscal year ended March 31, 2022, to incorporate disclosure regarding the contribution and growth of the Company’s services business. In addition, we will add to Item 7 of the Form 10-K the following definitions and use these terms consistently, including in our future earnings releases and earnings conference calls. We will also further clarify and distinguish our revenue categories in Item 1 of the Form 10-K.
Technology segment revenue generally falls into the following three categories:
- Product revenue: Revenue generated from the sale of third-party hardware, perpetual and subscription software, maintenance, software assurance, and services.
- Professional services: Revenue generated from our advanced professional services that are performed under time & materials, fixed fee, or milestone contracts. Professional services include cloud consulting, staff augmentation services, and project management services.
- Managed services: Revenue generated from our advanced managed services that include managing various aspects of our customers’ environments and are billed in regular intervals over a contract term, usually between three to five years. Managed services include security solutions, storage-as-a-service, cloud hosted services, cloud managed services, and service desk.
Product and Service Gross Margin
In response to the Staff’s comment, we updated the narrative disclosure to discuss the reason for the change of product gross margin and service gross margin; however, we note that the information presented below differs from the basis point changes referenced in the Staff’s comment, as those changes related to only the three months ended March 31, 2022, and not the full year, as presented below.
Product Inflation
Finally, while we have updated our disclosure to include that price inflation is a contributing factor to the increase in net sales, we are unable to quantify the impact of inflation due to the factors outlined in the April 21, 2023, Response Letter.
* * * * *
Set forth below are the select sections of our Technology segment results of operations disclosure for the year ended March 31, 2022, compared to the year ended March 31, 2021, which includes the updates highlighted above in response to the Staff’s comments. This updated disclosure will be included in our Form 10-K for the year ended March 31, 2023, to be filed today.
RESULTS OF OPERATIONS
The Year Ended March 31, 2022, Compared to the Year Ended March 31, 2021
TECHNOLOGY SEGMENT
The results of operations for our technology segment for the years ended March 31, 2022, and 2021, were as follows (in thousands):
Year Ended March 31,
Change
Net sales
Product
$ 1,492,411
$ 1,305,789
$ 186,622
14.3%
Services
240,625
202,165
38,460
19.0%
Total
1,733,036
1,507,954
225,082
14.9%
Cost of sales
Product
1,175,789
1,036,627
139,162
13.4%
Services
149,094
125,092
24,002
19.2%
Total
1,324,883
1,161,719
163,164
14.0%
Gross profit
408,153
346,235
61,918
17.9%
Selling, general, and administrative
283,690
256,210
27,480
10.7%
Depreciation and amortization
14,535
13,839
5.0%
Interest and financing costs
78.1%
Operating expenses
299,153
270,570
28,583
10.6%
Operating income
$ 109,000
$ 75,665
$ 33,335
44.1%
Gross billings
$ 2,625,749
$ 2,71,836
$ 353,913
15.6%
Adjusted EBITDA
$ 131,353
$ 97,219
$ 34,134
35.1%
Year Ended March 31,
Net sales by customer end market:
Change
Telecom, Media & Entertainment
$ 502,405
$ 371,912
$ 130,493
35.1%
Healthcare
270,481
200,067
70,414
35.2%
Technology
250,485
251,683
(1,198)
(0.5%)
SLED
241,769
245,919
(4,150)
(1.7%)
Financial Services
155,160
198,761
(43,601)
(21.9%)
All others
312,733
239,611
73,122
30.5%
Total
$ 1,733,036
$ 1,507,954
$ 225,082
14.9%
Year Ended March 31,
Net sales by type:
Change
Data Center / Cloud
$ 581,113
$ 516,930
$ 64,183
12.4%
Networking
611,488
510,205
101,283
19.9%
Security
158,927
155,186
3,741
2.4%
Collaboration
57,244
47,504
9,740
20.5%
Other
83,639
75,964
7,675
10.1%
ePlus Services
240,625
202,165
38,460
19.0%
Total
$ 1,733,036
$ 1,507,954
$ 225,082
14.9%
Net sales: Net sales for the year ended March 31, 2022, increased due to an increase in customer demand, primarily from customers in telecom, media and entertainment and healthcare industries, partially offset by a decrease in net sales to customers in the financial services sector. These changes were driven by growth in product sales in collaboration and networking, and third party maintenance and artificial intelligence included in the other category in the table above, which management, based on its industry knowledge, generally attributed to hybrid work models having become the prominent operating model for most of our customers. Timing of purchases by our existing customers are determined by their buying cycle and the timing of their specific IT related initiatives throughout the year.
Also contributing to the increase in net sales were increases in the cost of equipment we incurred from our suppliers due, in part, to inflation, which we typically pass on to our customers. Service revenues increased due to higher demand for both professional and managed services.
Our net sales by customer end market have remained consistent with the prior year, with over 80% of our sales being generated from customers within the five end markets specified in the table above.
Gross billings to our customers increased due to organic customer demand as well as our acquisition of Systems Management and Planning, Inc. (“SMP”) in December 2020, rather than acquisition or loss of a specific customer or set of customers.
Cost of sales: The increase in cost of sales for the year ended March 31, 2022, was due to the increase in demand for both product and services. Cost of product increased slightly less than the increase in product sales due to a change in product sales mix, as a greater portion of our transaction volume consisted of sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services, for which the revenues and cost of sales are presented on a net basis. Overall, cost of services increased 19.2%, consistent with the 19.0% increase in sales.
Gross profit: Gross profit increased for the 2022 fiscal year due to the increase in customer demand as well as higher margins. Gross margin in the Technology segment increased 60 basis points to 23.6%. Gross margin on product sales increased 60 basis points to 21.2% due to a shift in product mix to a greater proportion of sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services. Also contributing to the increase in product margins was higher vendor incentives earned, which increased $9.0 million in fiscal year 2022.
Service margin decreased 10 basis
Show Raw Text
CORRESP
1
filename1.htm
Elaine D. Marion
Chief Financial Officer
(O) 703.984.8040
emarion@eplus.com
May 24, 2023
VIA EDGAR
Office of Trade and Corporate Services
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Attention: Ms. Nasreen Mohammed
Mr. Lyn Shenk
Re: ePlus inc.
Form 10-K for the fiscal year ended March 31, 2022
Filed May 26, 2022
File No. 001-34167
Dear Staff:
This letter is submitted by ePlus inc. (the "Company") in response to the further comments from the staff (“Staff”) of the Division of Corporation Finance of the Securities and Exchange Commission dated May 15, 2023, with
respect to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2022 (the "Form 10-K"). This response letter supplements our prior responses provided to the Staff in our letter dated April 21, 2023 (the “April 21 Response
Letter”).
For your reference, the text of the comments contained in your May 15, 2023, letter have been reproduced below in bold text, followed
by the Company's responses.
Key Business Metrics, page 28
1. We note your response to comment one, including your plan to present gross billings as a metric rather than a non-GAAP financial measure. Please revise your definition to explain that
gross billings includes the gross transaction values for certain sales transactions that you recognize on a net basis and, therefore, includes amounts that will not be recognized as revenue.
RESPONSE:
In response to the above comment, in future filings, beginning with our Form 10-K for the fiscal year ended March 31, 2023, to be filed today, the Company will include the following definition of how gross billings as an operational metric is
determined:
ePlus inc. 13595 Dulles Technology Drive Herndon, VA 20171 (703) 984-8400 www.eplus.com
Gross billings are the total dollar value of customer purchases of goods and services including shipping
charges during the period, net of customer returns and credit memos, sales, or other taxes. Gross billings include the transaction values for certain sales transactions that are recognized on a net basis, and, therefore, includes amounts that
will not be recognized as revenue.
Management’s Discussion and Analysis
Financial Summary, page 31
2. We note your response to comment two. While you quantify sales by customer end market and vendor for the technology
segment and appear to focus on such in your disclosure, your narrative does not appear to explain "why" changes occurred other than what appears to be a more general reference to buying cycles and timing of IT initiatives. We note from your
fourth quarter earnings call that you experienced strong growth trends in your services business, which includes a wide range of professional and managed services, staffing, logistics and help desk services. However, your proposed revised
disclosure does not speak to this factor. We also note from the call that "annuity quality" services tend to have higher margins and more predictable financial performance, which you consider a positive trend. Finally, we note from the call
that product gross margin increased 20 basis points to 22.8%, while service gross margin decreased 390 basis points to 35.3%, reflecting lower professional service margins due to higher costs. Therefore, we continue to believe you should
attempt to further discuss the key drivers of changes in your results in a way you believe will allow investors to best understand the business as seen through the eyes of management. Additionally, we note from your response that you
experienced price inflation on purchases of products which are resold. Please expand your discussion to identify if inflation was a contributing factor in recording higher product revenues and clarify the resulting impact, if quantifiable.
RESPONSE:
In future filings, beginning with our Form 10-K for the fiscal year ended March 31, 2023, to be filed today, the Company will further update its disclosure within Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations to address several of the Staff’s suggestions regarding expanded narrative disclosure.
Buying Cycles and Timing of IT Initiatives
With respect to the first point raised by the Staff to provide further explanation of why changes occurred
in sales in the Technology segment, we respectfully advise the Staff that the changes we reported in our net sales within our Technology segment are primarily due to changes that we experience in customer demand that occur due to regular buying
cycles as customers have their scheduled purchases of equipment and services to maintain their IT systems, as well as specific IT projects that are initiated by our customers based on their own business and operational needs.
2
Management believes it is important for both the Company and investors to understand the demand by customer
industry and as such will continue to include a breakdown of the net sales by customer industry. Further, to align our disclosures in our filings with comments from management in earnings calls and other communications, we will replace the
breakdown of net sales by manufacturer in our disaggregation of revenue disclosure within the segment footnote with a breakdown of net sales by type of product.
Technology Service Revenue
In response to the Staff’s comment, we have updated the narrative disclosure for net sales for the full
fiscal year ended March 31, 2022, to incorporate disclosure regarding the contribution and growth of the Company’s services business. In addition, we will add to Item 7 of the Form 10-K the following definitions and use these terms
consistently, including in our future earnings releases and earnings conference calls. We will also further clarify and distinguish our revenue categories in Item 1 of the Form 10-K.
Technology segment revenue generally falls into the following three categories:
- Product revenue: Revenue generated from the sale of third-party hardware, perpetual and
subscription software, maintenance, software assurance, and services.
- Professional services: Revenue generated from our advanced professional services that are
performed under time & materials, fixed fee, or milestone contracts. Professional services include cloud consulting, staff augmentation services, and project management services.
- Managed services: Revenue generated from our advanced managed services that include managing
various aspects of our customers’ environments and are billed in regular intervals over a contract term, usually between three to five years. Managed services include security solutions, storage-as-a-service, cloud hosted services, cloud
managed services, and service desk.
3
Product and Service Gross Margin
In response to the Staff’s comment, we updated the narrative disclosure to discuss the reason for the
change of product gross margin and service gross margin; however, we note that the information presented below differs from the basis point changes referenced in the Staff’s comment, as those changes related to only the three months ended March
31, 2022, and not the full year, as presented below.
Product Inflation
Finally, while we have updated our disclosure to include that price inflation is a contributing factor to
the increase in net sales, we are unable to quantify the impact of inflation due to the factors outlined in the April 21, 2023, Response Letter.
* * * * *
Set forth below are the select sections of our Technology segment results of operations disclosure for the
year ended March 31, 2022, compared to the year ended March 31, 2021, which includes the updates highlighted above in response to the Staff’s comments. This updated disclosure will be included in our Form 10-K for the year ended March 31, 2023,
to be filed today.
4
RESULTS OF OPERATIONS
The Year Ended March 31, 2022, Compared to the Year Ended March 31, 2021
TECHNOLOGY SEGMENT
The results of operations for our technology segment for the years ended March 31, 2022, and 2021, were as
follows (in thousands):
Year Ended March 31,
2022
2021
Change
Net sales
Product
$ 1,492,411
$ 1,305,789
$ 186,622
14.3%
Services
240,625
202,165
38,460
19.0%
Total
1,733,036
1,507,954
225,082
14.9%
Cost of sales
Product
1,175,789
1,036,627
139,162
13.4%
Services
149,094
125,092
24,002
19.2%
Total
1,324,883
1,161,719
163,164
14.0%
Gross profit
408,153
346,235
61,918
17.9%
Selling, general, and administrative
283,690
256,210
27,480
10.7%
Depreciation and amortization
14,535
13,839
696
5.0%
Interest and financing costs
928
521
407
78.1%
Operating expenses
299,153
270,570
28,583
10.6%
Operating income
$ 109,000
$ 75,665
$ 33,335
44.1%
Gross billings
$ 2,625,749
$ 2,71,836
$ 353,913
15.6%
Adjusted EBITDA
$ 131,353
$ 97,219
$ 34,134
35.1%
Year Ended March 31,
Net sales by customer end market:
2022
2021
Change
Telecom, Media & Entertainment
$ 502,405
$ 371,912
$ 130,493
35.1%
Healthcare
270,481
200,067
70,414
35.2%
Technology
250,485
251,683
(1,198)
(0.5%)
SLED
241,769
245,919
(4,150)
(1.7%)
Financial Services
155,160
198,761
(43,601)
(21.9%)
All others
312,733
239,611
73,122
30.5%
Total
$ 1,733,036
$ 1,507,954
$ 225,082
14.9%
Year Ended March 31,
Net sales by type:
2022
2021
Change
Data Center / Cloud
$ 581,113
$ 516,930
$ 64,183
12.4%
Networking
611,488
510,205
101,283
19.9%
Security
158,927
155,186
3,741
2.4%
Collaboration
57,244
47,504
9,740
20.5%
Other
83,639
75,964
7,675
10.1%
ePlus Services
240,625
202,165
38,460
19.0%
Total
$ 1,733,036
$ 1,507,954
$ 225,082
14.9%
5
Net
sales: Net sales for the year ended March 31, 2022, increased due to an increase in customer demand, primarily from customers in
telecom, media and entertainment and healthcare industries, partially offset by a decrease in net sales to customers in the financial services sector. These changes were driven by growth in product sales
in collaboration and networking, and third party maintenance and artificial intelligence included in the other category in the table above, which management, based on its industry knowledge, generally attributed to hybrid work models having
become the prominent operating model for most of our customers. Timing of purchases by our existing customers are determined by their buying cycle and the timing of their specific IT related initiatives throughout the year.
Also contributing to the increase in net sales were increases in the cost of equipment we
incurred from our suppliers due, in part, to inflation, which we typically pass on to our customers. Service revenues increased due to higher demand for both professional and managed services.
Our net sales by customer end market have remained consistent with the prior year, with
over 80% of our sales being generated from customers within the five end markets specified in the table above.
Gross billings to our customers increased due to organic customer demand as well as our
acquisition of Systems Management and Planning, Inc. (“SMP”) in December 2020, rather than acquisition or loss of a specific customer or set of customers.
Cost
of sales: The increase in cost of sales for the year ended March 31, 2022, was due to the increase in demand for both product and services. Cost of product increased slightly less than the increase
in product sales due to a change in product sales mix, as a greater portion of our transaction volume consisted of sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services, for which the revenues and cost of
sales are presented on a net basis. Overall, cost of services increased 19.2%, consistent with the 19.0% increase in sales.
Gross
profit: Gross profit increased for the 2022 fiscal year due to the increase in customer demand as well as higher margins. Gross margin in the Technology segment increased 60 basis points to 23.6%.
Gross margin on product sales increased 60 basis points to 21.2% due to a shift in product mix to a greater proportion of sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services. Also contributing to the
increase in product margins was higher vendor incentives earned, which increased $9.0 million in fiscal year 2022.
6
Service margin decreased 10 basis