EPLUS INC 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion is intended to further the reader’s understanding of our consolidated financial condition and results of operations. It should be read in conjunction with the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements included in our 2023 Annual Report. These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described in Part I, Item 1A, “Risk Factors,” in our 2023 Annual Report, as well as in our other filings with the SEC. EXECUTIVE OVERVIEW BUSINESS DESCRIPTION We are a leading solutions provider in the areas of security, cloud, networking, collaboration, artificial intelligence, and emerging technologies to domestic and foreign organizations across all industry segments. We deliver actionable outcomes for organizations by using information technology (“IT”) and consulting solutions to drive business agility and innovation. Leveraging our engineering talent, we assess, plan, deliver, and secure solutions comprised of leading technologies and consumption models aligned with our customers’ needs. Our expertise and experience enable us to craft optimized solutions that take advantage of the cost, scale, and efficiency of private, public and hybrid cloud in an evolving market. As part of our solutions, we provide consulting, professional services, managed services, IT staff augmentation, and complete lifecycle management services in the areas of security, cloud, networking, collaboration, and emerging technologies. Additionally, we offer flexible financing for purchases from us and from third parties. We have been in the business of selling, leasing, financing, and managing IT and other assets for more than 30 years. Our primary focus is to deliver integrated solutions that address our customers’ business needs, leveraging the appropriate technologies, both on-premises and in the cloud. Our approach is to lead with advisory consulting to understand our customers’ needs, and then design, deploy, and manage solutions aligned to their objectives. Underpinning the broader areas of cloud, security, networking, and collaboration are specific skills in orchestration and automation, application modernization, DevSecOps, zero-trust architectures, data management, data visualization, analytics, network modernization, edge compute and other advanced and emerging technologies. These solutions are comprised of class-leading technologies from partners such as Amazon Web Services, Arista Networks, Check Point, Cisco Systems, Citrix, Commvault, Crowdstrike, Deepwatch, Dell EMC, F5 Networks, Foresite, Fortinet, Gigamon, HPE, Juniper Networks, Lenovo, Microsoft, NetApp, Nutanix, NVIDIA, Oracle, Palo Alto Networks, Proficio, Pure Storage, Rubrik, Splunk, Varonis, and VMware, among many others. We are an authorized reseller of over 1,500 vendors, which enable us to provide our customers with new and evolving IT solutions. We possess top-level engineering certifications with a broad range of leading IT vendors that enable us to offer multi-vendor IT solutions that are optimized for each of our customers’ specific requirements. Our hosted, proprietary software solutions are focused on giving our customers more control over their IT supply chain, by automating and optimizing the procurement and management of their owned, leased, and consumption-based assets. Our scale and financial resources have enabled us to continue investing in engineering and technology resources to stay at the forefront of technology trends. Our expertise in core and emerging technologies, buttressed by our robust portfolio of consulting, professional, and managed services, has enabled us to remain a trusted advisor for our customers. In addition, we offer a wide range of consumption options including leasing and financing for technology and other capital assets. We believe our lifecycle approach offering of integrated solutions, services and financing, asset management and our proprietary supply chain software, is unique in the industry. This broad portfolio enables us to deliver a customized customer experience that spans the continuum from fast delivery of competitively priced products and services to subsequent management and maintenance, and through to end-of-life disposal services. This approach permits us to deploy sophisticated solutions to enable our customers’ business outcomes. 27 Table of Contents Our go-to-market strategy focuses primarily on diverse end-markets for middle market to large enterprises. We serve customers in markets including telecom, media and entertainment, technology, state and local government and educational institutions (“SLED”), healthcare, and financial services. We sell to customers in the United States (“US”), which account for most of our sales, and to customers in select international markets including the United Kingdom (“UK”), the European Union (“EU”), India, Singapore, and Israel. Our technology business segments accounted for 99% of our net sales and 94% of our operating income, while our financing segment accounted for 1% of our net sales and 6% of our operating income, for the three months ended June 30, 2023. BUSINESS TRENDS We believe the following key business trends are impacting our business performance and our ability to achieve business results: • General economic concerns including inflation, rising interest rates, staffing shortages, remote work trends, and global unrest may impact our customers’ willingness to spend on technology and services. • A worldwide shortage of certain IT products is resulting from, among other things, shortages in semiconductors and other product components. Like others in the industry, we are experiencing ongoing supply constraints that have affected, and could continue to further affect, lead times for delivery of products, our having to carry more inventory for longer periods, the cost of products, vendor return and cancellation policies, and our ability to meet customer demands. We continue to work closely with our suppliers to further mitigate disruptions outside our control. Despite these actions, we believe extended lead times will likely persist for at least the next few quarters. • We are experiencing increases in prices from our suppliers, as well as rising wages and interest rates. We generally have been able to pass price increases to our customers. Our labor costs related to services we perform will take longer to pass to customers that have service engagements where prices may be set. Our financing quotes are generally indexed to market changes to enable us to change rates from time of quote to funding. Financing transactions funded with our cash flows, not debt, are subject to interest rate risk. If the market interest rate exceeds our internal rate of return, we may not fund the transaction to obtain the proceeds and lock in our profit on the transaction. Accordingly, inflation could have a material impact on our sales, gross profit, or operating costs in the future. • Customers’ top focus areas include security, cloud solutions, hybrid work environments (work from home, work from anywhere, and return to office), as well as digital transformation and modernization. We have developed advisory services, solutions, and professional and managed services to meet these priorities and help our customers attain and maintain their desired outcome. • Modernizing legacy applications, data modernization, reducing operational complexity, securing workloads, the cost and performance of IT operations, and agility are changing the way companies are purchasing and consuming technology. These are fueling deployments of solutions on cloud, managed services and hybrid platforms and licensing models, which may include invoicing over the term of the agreement. • Rapid cloud adoption has led to customer challenges around increasing costs, security concerns, and skillset gaps. These challenges are consistent across all industries and sizes. We have developed a Cloud Managed Services portfolio to address these needs, allowing our clients to focus on driving business outcomes via optimized and secure cloud platforms. KEY BUSINESS METRICS Our management monitors several financial and non-financial measures and ratios on a regular basis to track the progress of our business. We believe that the most important of these measures and ratios include net sales, gross margin, operating income margin, net earnings, and net earnings per common share, in each case based on information prepared in accordance with US GAAP, as well as the non-GAAP financial measures and ratios, including Adjusted EBITDA, Adjusted EBITDA margin, Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share. We use a variety of operating and other information to evaluate the operating performance of our business, develop financial forecasts, make strategic decisions, and prepare and approve annual budgets. We use Gross billings as an operational metric to assess the volume of transactions within our Technology business as well as to understand changes in our accounts receivable. We believe Gross billings will aid investors in the same manner. 28 Table of Contents These key indicators include financial information that is prepared in accordance with US GAAP and presented in our consolidated financial statements, as well as non-GAAP and operational performance measurement tools. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance or financial position that either excludes or includes amounts that are correspondingly not normally excluded or included in the most directly comparable measure calculated and presented in accordance with US GAAP. Our use of non-GAAP information as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results reported under GAAP, as these measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures. Set forth in footnotes (1) and (2) of the tables that immediately follow this paragraph, we set forth our reasons for using and presenting Adjusted EBITDA, Adjusted EBITDA margin, Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share-diluted in the tables and discussion that follow. 29 Table of Contents The following table provides our key business metrics (in thousands, except per share amounts): Three Months Ended June 30, Consolidated 2023 2022 Financial Metrics Net sales $ 574,175 $ 458,359 Gross profit $ 142,273 $ 113,523 Gross margin 24.8 % 24.8 % Operating income margin 8.1 % 7.2 % Net earnings $ 33,847 $ 22,339 Net earnings margin 5.9 % 4.9 % Net earnings per common share - diluted $ 1.27 $ 0.84 Non-GAAP Financial Metrics Non-GAAP: Net earnings (1) $ 37,687 $ 26,513 Non-GAAP: Net earnings per common share - diluted (1) $ 1.41 $ 0.99 Adjusted EBITDA (2) $ 53,879 $ 38,304 Adjusted EBITDA margin 9.4 % 8.4 % Technology Business Financial Metrics Net sales $ 565,685 $ 448,785 Gross profit $ 135,912 $ 105,651 Gross margin 24.0 % 23.5 % Operating income $ 43,498 $ 29,219 Non-GAAP Financial Metric Adjusted EBITDA (2) $ 50,949 $ 34,254 Operational Metric Gross billings (3) Cloud $ 258,924 $ 253,337 Networking 276,645 165,626 Security 147,343 145,349 Collaboration 22,161 34,775 Other 69,761 49,009 Product gross billings 774,834 648,096 Service gross billings 67,136 68,167 Total gross billings $ 841,970 716,263 Financing Segment Financial Metrics Net sales $ 8,490 $ 9,574 Gross profit $ 6,361 $ 7,872 Operating income $ 2,834 $ 3,964 Non-GAAP Financial Metric Adjusted EBITDA (2) $ 2,930 $ 4,050 (1) Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted are based on net earnings calculated in accordance with US GAAP, adjusted to exclude other (income) expense, share-based compensation, and acquisition and integration expenses, and the related tax effects. 30 Table of Contents We use Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted as supplemental measures of our performance to gain insight into our operating performance and performance trends. We believe that the exclusion of other income and acquisition-related amortization expense in calculating Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted provides management and investors a useful measure for period-to-period comparisons of our business and operating results by excluding items that management believes are not reflective of our underlying operating performance. Accordingly, we believe that Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted provide useful information to investors and others in understanding and evaluating our operating results. However, our use of non-GAAP information as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under US GAAP. In addition, other companies, including companies in our industry, might calculate similar Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted or similarly titled measures differently, which may reduce their usefulness as comparative measures. The following table provides our calculation of Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted (in thousands, except per share amounts): Three Months Ended June 30, 2023 2022 GAAP: Earnings before tax $ 46,522 $ 31,030 Share based compensation 2,205 1,773 Acquisition related amortization expense 3,469 2,183 Other (income) expense (190 ) 2,153 Non-GAAP: Earnings before provision for income taxes 52,006 37,139 GAAP: Provision for income taxes 12,675 8,691 Share based compensation 607 508 Acquisition related amortization expense 952 617 Other (income) expense (52 ) 616 Tax benefit (expense) on restricted stock 137 194 Non-GAAP: Provision for income taxes 14,319 10,626 Non-GAAP: Net earnings $ 37,687 $ 26,513 Three Months Ended June 30, 2023 2022 GAAP: Net earnings per common share - diluted $ 1.27 $ 0.84 Share based compensation 0.06 0.04 Acquisition and integration expense - - Acquisition related amortization expense 0.09 0.06 Other (income) expense - 0.06 Tax benefit (expense) on restricted stock (0.01 ) (0.01 ) Total non-GAAP adjustments - net of tax 0.14 0.15 Non-GAAP: Net earnings per common share - diluted $ 1.41 $ 0.99 (2) We define Adjusted EBITDA as net earnings calculated in accordance with US GAAP, adjusted for the following: interest expense, depreciation and amortization, share-based compensation, acquisition and integration expenses, provision for income taxes, and other income. Segment Adjusted EBITDA is defined as operating income calculated in accordance with US GAAP, adjusted for interest expense, share-based compensation, acquisition and integration expenses, and depreciation and amortization. We consider the interest on notes payable from our financing segment and depreciation expense presented within cost of sales, which includes depreciation on assets financed as operating leases, to be operating expenses. As such, they are not included in the amounts added back to net earnings in the Adjusted EBITDA calculation. In the table below, we provide a reconciliation of Adjusted EBITDA to net earnings, which is the most directly comparable financial measure to this non-GAAP financial measure. Adjusted EBITDA margin is our calculation of Adjusted EBITDA divided by net sales. 31 Table of Contents We use Adjusted EBITDA as a supplemental measure of our performance to gain insight into our operating performance and performance trends. We believe that the exclusion of other income in calculating Adjusted EBITDA and Adjusted EBITDA margin provides management and investors a useful measure for period-to-period comparisons of our business and operating results by excluding items that management believes are not reflective of our underlying operating performance. Accordingly, we believe that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results. However, our use of Adjusted EBITDA and Adjusted EBITDA margin as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under US GAAP. In addition, other companies, including companies in our industry, might calculate Adjusted EBITDA and Adjusted EBITDA margin or similarly titled measures differently, which may reduce their usefulness as comparative measures. The following table provides our calculations of Adjusted EBITDA (in thousands): Three Months Ended June 30, Consolidated 2023 2022 Net earnings $ 33,847 $ 22,339 Provision for income taxes 12,675 8,691 Share based compensation 2,205 1,773 Interest and financing costs 550 138 Depreciation and amortization 4,792 3,210 Other income (expense) (190 ) 2,153 Adjusted EBITDA $ 53,879 $ 38,304 Technology Business Operating income $ 43,498 $ 29,219 Depreciation and amortization 4,764 3,182 Share based compensation 2,137 1,715 Interest and financing costs 550 138 Adjusted EBITDA $ 50,949 $ 34,254 Financing Segment Operating income $ 2,834 $ 3,964 Depreciation and amortization 28 28 Share based compensation 68 58 Adjusted EBITDA $ 2,930 $ 4,050 (3) 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 includes 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. 32 Table of Contents CONSOLIDATED RESULTS OF OPERATIONS Net sales : Net sales for the three months ended June 30, 2023, increased 25.3% to $574.2 million, or an increase of $115.8 million compared to $458.4 million in the same three-month period in the prior year. The increase in net sales was driven by higher revenues from our technology business segments, offset by lower revenues from our financing segment. The increase in sales from the technology business segments was due to increases in both product and managed services sales, driven by increased demand from our customers, including customers from the Network Solutions Group (“NSG”) and Future Com acquisitions. These increases were offset by lower professional service sales due to lower staff augmentation revenues due to softer demand by our customers. The decline in revenues from our financing segment was due to lower transactional gains from the sale of financial assets and lower month-to-month rents. Gross billings from our technology business segments for the three months ended June 30, 2023, increased by 17.6%, or $125.7 million, to $842.0 million compared to $716.3 million in the same three-month period in the prior year. Gross billings increased due to both organic customer demand as well as from the acquisitions of NSG and Future Com. Gross profit : Gross profit for the three months ended June 30, 2023, increased 25.3%, to $142.3 million, compared to $113.5 million in the same three-month period in the prior year due to increased net sales volume. Overall, gross margins were consistent quarter over quarter as higher product margins in our technology business were offset by lower margins in our financing segment. Operating expenses : Operating expenses for the three months ended June 30, 2023, increased $15.6 million, or 19.4%, to $95.9 million, as compared to $80.3 million for the same three-month period in the prior year. Our increase in operating expenses was primarily due to an increase of $12.1 million in salaries and benefits, mainly driven by an increase in headcount as well as higher variable compensation corresponding to the increase in gross profit. As of June 30, 2023, we had 1,853 employees, an increase of 13.2% from 1,637 as of June 30, 2022. General and administrative expenses also increased $1.6 million for the three-months ended June 30, 2023, compared to the three months ended June 30, 2022, as we had higher software, subscription and maintenance fees and travel and entertainment costs. Travel and entertainment increased due to the return of in-person business meetings and events. In addition, we had higher professional fees, mainly driven by certain internal projects. Depreciation and amortization increased $1.6 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, due to increased amortization of intangible assets from the acquisition of NSG. Interest and financing costs increased $0.5 million for the three months ended June 30, 2023, compared to the same three-month period in the prior year due to higher outstanding borrowings. Offsetting these increases was a decrease of $0.2 million in provision for credit losses. Operating income : As a result of the foregoing, operating income for the three months ended June 30, 2023, increased $13.1 million, or 39.6%, to $46.3 million, as compared to $33.2 million for the three months ended June 30, 2022, and operating margin increased by 90 basis points to 8.1%. The increase in operating income was due to increases from our technology business segments, which was offset by lower operating income from our financing segment. Adjusted EBITDA for the three months ended June 30, 2023, was $53.9 million, an increase of $15.6 million, or 40.7%, compared to the same three-month period in the prior year. Adjusted EBITDA margin for the three months ended June 30, 2023, increased 100 basis points to 9.4%, as compared to the three months ended June 30, 2022, of 8.4%. The increase in Adjusted EBITDA was due to increases from our technology business, which was offset by lower Adjusted EBITDA from our financing segment. Net earnings per common share diluted for the three months ended June 30, 2023, increased $0.43, or 51.2%, to $1.27 per share, as compared to $0.84 per share in the same three-month period in the prior year. Non-GAAP: Net earnings per common share diluted for the three months ended June 30, 2023, increased $0.42, or 42.4%, to $1.41 per share, as compared to $0.99 per share for the three months ended June 30, 2022. 33 Table of Contents SEGMENT OVERVIEW TECHNOLOGY BUSINESS SEGMENTS Our technology business includes three segments: product, professional services and managed services as further discussed below. • Product segment: Our product segment consists of the sale of third-party hardware, third-party perpetual and subscription software, and third-party maintenance, software assurance, and other third-party services. The product segment also includes internet-based business-to-business supply chain management solutions for IT products. • Professional services segment: Our professional services segment includes our advanced professional services to our customers that are performed under time and materials, fixed fee, or milestone contracts. Professional services include cloud consulting, staff augmentation services, and project management services. • Managed services segment: Our managed services segment includes 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 also include security solutions, storage-as-a-service, cloud hosted services, cloud managed services, and service desk. This is the first quarterly period in which we are reporting these three separate segments within our technology business as we previously consolidated this information within a single technology segment. Based upon our current business and operations, we intend to continue reporting these three segments that will comprise our technology business. Our technology business segments sell primarily to corporations, state and local governments, and higher education institutions. Customers of our technology business may have a customer master agreement (“CMA”) with our company, which stipulates the terms and conditions of the commercial relationship. Some CMAs contain pricing arrangements, and most contain mutual voluntary termination clauses. Our other customers place orders using purchase orders without a CMA in place or with other documentation customary for the business. Often, our work with state and local governments is based on public bids and our written bid responses. Our service engagements are generally governed by statements of work and are primarily fixed price (with allowance for changes); however, some service agreements are based on time and materials. We endeavor to minimize the cost of sales in our product segment through incentive programs provided by vendors and distributors. The programs we qualify for are generally set by our reseller authorization level with the vendor. The authorization level we achieve and maintain governs the types of products we can resell as well as such items as variable discounts applied against the list price, funds provided for the marketing of these products and other special promotions. These authorization levels are achieved by us through purchase volume, certifications held by sales executives or engineers and/or contractual commitments by us. The authorization levels are costly to maintain, and these programs continually change; therefore, there is no guarantee of future reductions of costs provided by these vendor consideration programs. FINANCING SEGMENT Our financing segment offers financing solutions to corporations, government contractors, state and local governments, and educational institutions in the US, which accounts for most of our transactions, and to corporations in select international markets including Canada, the UK, and the EU. The financing segment derives revenue from leasing IT equipment, medical equipment, and other equipment, and the disposition of that equipment at the end of the lease. The financing segment also derives revenues from the financing of third-party software licenses, software assurance, maintenance, and other services. 34 Table of Contents Financing revenue generally falls into the following three categories: • Portfolio income: Interest income from financing receivables and rents due under operating leases. • Transactional gains: Net gains or losses on the sale of financial assets. • Post-contract earnings: Month-to-month rents; early termination, prepayment, make-whole, or buyout fees; and the sale of off-lease (used) equipment. FLUCTUATIONS IN OPERATING RESULTS Our operating results may fluctuate due to customer demand for our products and services, supplier costs, product availability, changes in vendor incentive programs, interest rate fluctuations, currency fluctuations, the timing of sales of financial assets, general economic conditions, and differences between estimated residual values and actual amounts realized for leased equipment. We expect to continue to expand by hiring additional staff for specific targeted market areas and roles whenever we can find both experienced personnel and desirable geographic areas over the longer term, which may impact our operating results. SEGMENT RESULTS OF OPERATIONS The three months ended June 30, 2023, compared to the three months ended June 30, 2022 TECHNOLOGY BUSINESS SEGMENTS The results of operations for our technology business segments were as follows (dollars in thousands): 35 Table of Contents Three Months Ended June 30, 2023 2022 Change Percent Change Financial Metrics Net sales Product $ 498,166 $ 385,676 $ 112,490 29.2 % Professional Services 35,556 37,168 (1,612 ) (4.3 %) Managed Services 31,963 25,941 6,022 23.2 % Total 565,685 448,785 116,900 26.0 % Gross Profit Product 111,391 83,168 28,223 33.9 % Professional Services 14,724 15,055 (331 ) (2.2 %) Managed Services 9,797 7,428 2,369 31.9 % Total 135,912 105,651 30,261 28.6 % Selling, general, and administrative 87,100 73,112 13,988 19.1 % Depreciation and amortization 4,764 3,182 1,582 49.7 % Interest and financing costs 550 138 412 298.6 % Operating expenses 92,414 76,432 15,982 20.9 % Operating income $ 43,498 $ 29,219 $ 14,279 48.9 % Key Metrics & Other Information Gross billings $ 841,970 $ 716,263 $ 125,707 17.6 % Adjusted EBITDA $ 50,949 $ 34,254 $ 16,695 48.7 % Product margin 22.4 % 21.6 % Professional service margin 41.4 % 40.5 % Managed service margin 30.7 % 28.6 % Net sales by customer end market: Telecom, media & entertainment $ 141,335 $ 128,277 $ 13,058 10.2 % SLED 109,405 64,602 44,803 69.4 % Healthcare 86,656 68,512 18,144 26.5 % Technology 73,403 69,862 3,541 5.1 % Financial services 65,690 33,299 32,391 97.3 % All others 89,196 84,233 4,963 5.9 % Total $ 565,685 $ 448,785 $ 116,900 26.0 % Net sales by type: Networking $ 245,188 $ 142,641 $ 102,547 71.9 % Cloud 172,044 164,733 7,311 4.4 % Security 45,796 47,995 (2,199 ) (4.6 %) Collaboration 12,956 12,980 (24 ) (0.2 %) Other 22,182 17,327 4,855 28.0 % Total Products 498,166 385,676 112,490 29.2 % Professional services 35,556 37,168 (1,612 ) (4.3 %) Managed services 31,963 25,941 6,022 23.2 % Total $ 565,685 $ 448,785 $ 116,900 26.0 % 36 Table of Contents Net sales : Net sales of the combined technology business for the three months ended June 30, 2023, increased compared to the three months ended June 30, 2022, driven by demand from customers in telecom, media, and entertainment, financial services, SLED, and healthcare industries. Product segment sales for the three months ended June 30, 2023, increased compared to the same three-month period in the prior year due to higher sales of networking equipment and cloud products. These changes were driven by the timing of purchases by existing customers, which are determined by their buying cycles, and the timing of specific IT related initiatives. In addition, the increase in net product sales during this three-month period, was due to demand from customers from the NSG and Future Com acquisitions, which combined contributed $34.8 million to the increase in product net sales. Also contributing to the increase in product sales were improvements in the supply chain, particularly networking products. Professional services segment sales for the three months ended June 30, 2023, decreased compared to the three months ended June 30, 2022, due to a decrease in staff augmentation revenue of $1.9 million primarily related to softer demand from customers. Offsetting this decline was higher project related services of $0.3 million. Managed services segment sales for the three months ended June 30, 2023, increased compared to the three months ended June 30, 2022, due to ongoing expansion of these service offerings primarily related to ongoing growth in Enhanced Maintenance Support (“EMS”) and Security Operations Center (“SOC”) revenue. Gross profit : Gross profit of the combined technology business segments for the three months ended June 30, 2023, increased compared to the three months ended June 30, 2022, due to the increase in product and managed service sales. Gross margin increased during this three-month period due to higher product, professional service, and managed service margins. Product segment margin for the three months ended June 30, 2023, increased by 80 basis points from the same three-month period in the prior year as higher up-front margins were offset by lower vendor rebates and a lower proportion of sales of third-party maintenance, software assurance, subscriptions/SaaS licenses, and services, which was recognized on a net basis. The increase in margin was due to the timing of customer buying cycles and specific IT initiatives. Professional services segment margins for the three months ended June 30, 2023, increased by 90 basis points from the same three-month period in the prior year primarily due to a shift in mix toward higher margin project-based services. Managed services segment margins for the three months ended June 30, 2023, increased by 210 basis points from the same three-month period in the prior year due to improved margins as we continue to scale these service offerings. Selling, general, and administrative : Selling, general, and administrative expenses for the three technology business segments for the three months ended June 30, 2023, increased compared to the three months ended June 30, 2022, mainly due to increases in salaries and benefits. Salaries and benefits for the three months ended June 30, 2023, increased $12.4 million, or 20.1% to $74.1 million, as compared to $61.7 million for the same period in the prior year, due to an increase of $8.0 million in salaries and benefits, mainly driven by increased headcount, and an increase of $4.4 million in variable compensation because of the increase in gross profit. Our three technology business segments had an aggregate of 1,818 employees as of June 30, 2023, an increase of 216 from 1,602 as of June 30, 2022, of which 83 were from the acquisition of NSG. In total, we added 171 additional customer-facing employees for the three months ended June 30, 2023, compared to the same three-month period in the prior year, of which 84 were professional services and technical support personnel due to demand for our services. General and administrative expenses for the three technology business segments for the three months ended June 30, 2023, increased $1.4 million, or 12.5%, to $12.5 million, as compared to $11.1 million for the same three-month period in the prior year, due to higher professional fees of $0.8 million, mainly driven by certain internal projects. In addition, we incurred higher travel and entertainment costs of $0.2 million due to the return of in-person business meetings and events. 37 Table of Contents Provision for credit losses for the three technology business segments for the three months ended June 30, 2023, was $0.5 million, as compared to $0.3 million for the same three-month period in the prior year. Our higher provision for credit losses for the three months ended June 30, 2023, was due to changes in our net credit exposure. Depreciation and amortization : Depreciation and amortization of the three technology business segments for the three months ended June 30, 2023, increased compared to the three months ended June 30, 2022, primarily due to more amortization from intangible assets acquired in the NSG acquisition. Interest and financing costs : Interest and financing costs of the three technology business segments for the three months ended June 30, 2023, increased compared to the three months ended June 30, 2022, due to higher average borrowings outstanding and higher interest rates under our WFCDF Credit Facility. FINANCING SEGEMENT The results of operations for our financing segment were as follows (dollars in thousands): Three Months Ended June 30, 2023 2022 Change Percent Change Financial Metrics Portfolio earnings $ 3,073 $ 2,673 $ 400 15.0 % Transactional gains 1,279 1,835 (556 ) (30.3 %) Post-contract earnings 3,634 4,726 (1,092 ) (23.1 %) Other 504 340 164 48.2 % Net sales $ 8,490 $ 9,574 $ (1,084 ) (11.3 %) Gross profit 6,361 7,872 (1,511 ) (19.2 %) Selling, general, and adminstrative 3,198 3,655 (457 ) (12.5 %) Depreciation and amortization 28 28 - 0.0 % Interest and financing costs 301 225 76 33.8 % Operating expenses 3,527 3,908 (381 ) (9.7 %) Operating income $ 2,834 $ 3,964 $ (1,130 ) (28.5 %) Key Metrics & Other Information Adjusted EBITDA $ 2,930 $ 4,050 $ (1,120 ) (27.7 %) Net sales : Net sales for the three months ended June 30, 2023, decreased due to lower post-contract earnings and transactional gains. Post-contract earnings decreased due to lower month-to-month rents. Transactional gains decreased compared to the prior year due to lower margin from financial assets sold during the quarter. Total proceeds from sales of financing receivables were $61.4 million and $52.5 million for the three months ended June 30, 2023, and 2022, respectively. Gross Profit : Gross profit for the three months ended June 30, 2023, decreased compared to the three months ended June 30, 2022, due to higher cost of sales on off-lease equipment and direct lease costs, which were offset slightly by lower depreciation expense from operating leases. 38 Table of Contents Selling, general and administrative : Selling, general, and administrative expenses for the three months ended June 30, 2023, decreased compared to the three months ended June 30, 2022, due to reduced provision for credit losses because of changes in our net credit exposure. In addition, salaries and benefits decreased, mainly driven by a decrease in variable compensation due to the decline in gross profit. These decreases are offset by a slight increase in general and administrative costs due to the deployment of a hosted lease accounting software in August 2022, as we incurred higher professional fees following the implementation of this software platform, as well as higher software license and maintenance costs including amortization of the costs to implement the hosted software. Interest and financing costs : Interest and financing costs for the three months ended June 30, 2023, increased slightly compared to the three months ended June 30, 2022, due to higher interest rates. As of June 30, 2023, our non-recourse notes payable decreased to $20.2 million from $26.4 million in the prior year. Our weighted average interest rate for non-recourse notes payable was 5.22% and 3.78% as of June 30, 2023, and 2022, respectively. CONSOLIDATED Other income (expense), net : Other income (expense), net, for the three months ended June 30, 2023, increased to $0.2 million, compared to a net expense of $2.2 million in the prior year. We incurred $0.4 million of interest and dividend income on investments, offset by foreign currency transaction losses of $0.2 million during the three months ended June 30, 2023, compared to foreign currency transaction losses of $2.2 million in the same three-month period in the prior year. Provision for income taxes : Our provision for income tax expense was $12.7 million for the three months ended June 30, 2023, as compared to $8.7 million for the same three-month period in the prior year. Our effective tax rate for the three months ended June 30, 2023, was 27.2%, compared with 28.0% for the same period in the prior year. Our effective tax rate was lower for the three months ended June 30, 2023, as compared to the prior year, primarily due to a lower state effective tax rate. Net earnings : Net earnings for the three months ended June 30, 2023, were $33.8 million, an increase of 51.5% or $11.5 million, as compared to $22.3 million in the prior year. The net earnings increase was due primarily to the increase in operating profits from our technology business. Basic and fully diluted earnings per common share were both $1.27, for the three months ended June 30, 2023, an increase of 51.2% over the prior year. Basic and fully diluted earnings per common share were both $0.84, for the three months ended June 30, 2022. Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share were both 26.6 million for the three months ended June 30, 2023. Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share were 26.5 million and 26.7 million, respectively, for the three months ended and June 30, 2022. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY OVERVIEW We finance our operations through funds generated from operations and through borrowings. We use those funds to meet our capital requirements, which have historically consisted primarily of working capital for operational needs, capital expenditures, purchases of equipment for lease, payments of principal and interest on indebtedness outstanding, acquisitions and the repurchase of shares of our common stock. Our borrowings in our technology business segments are through our WFCDF Credit Facility. Our borrowings in our financing segment are primarily through secured borrowings that involve transferring all or part of the contractual payments due to us to third-party financing institutions. 39 Table of Contents We believe that cash on hand and funds generated from operations, together with available credit under our credit facility, will be enough to finance our working capital, capital expenditures, and other requirements for at least the next year. Our ability to continue to expand, both organically and through acquisitions, is dependent upon our ability to generate enough cash flow from operations or from borrowing or other sources of financing as may be required. While at this time we do not anticipate requiring any additional sources of financing to fund operations, if demand for IT products declines, or if our supply of products is delayed or interrupted, our cash flows from operations may be substantially affected. CASH FLOWS The following table summarizes our sources and uses of cash for the three months ended June 30, 2023, and 2022 (in thousands): Three Months Ended June 30, 2023 2022 Net cash used in operating activities $ (20,900 ) $ (102,943 ) Net cash used in investing activities (63,097 ) (1,692 ) Net cash provided by (used in) financing activities 82,605 31,111 Effect of exchange rate changes on cash (127 ) 1,634 Net deccrease in cash and cash equivalents $ (1,519 ) $ (71,890 ) Cash flows from operating activities : We used $20.9 million in operating activities during the three months ended June 30, 2023, compared to using $102.9 million for the three months ended June 30, 2022. See below for a breakdown of operating cash flows by segment (in thousands): Three Months Ended June 30, 2023 2022 Technology business $ (48,259 ) $ (104,645 ) Financing segment 27,359 1,702 Net cash used in operating activities $ (20,900 ) $ (102,943 ) Technology business : For the three months ended June 30, 2023, our technology business used $48.3 million from operating activities primarily due to increases in our accounts receivable of $159.3 million, offset by an increase in accounts payable - trade of $60.2 million and net earnings. Further, we had net borrowings on the floor plan component of our credit facility of $32.3 million. We use this credit facility to manage working capital needs, however, we present changes in this balance as financing activity in our consolidated statement of cash flows. For the three months ended June 30, 2022, our technology business used $104.6 million from operating activities primarily due to increases in our accounts receivable and inventories, offset by net earnings. Further, we had net repayments on the floor plan component of our credit facility of $7.3 million. To manage our working capital, we monitor our cash conversion cycle for our technology business, which is defined as days sales outstanding (“DSO”) in accounts receivable plus days of supply in inventory (“DIO”) minus days of purchases outstanding in accounts payable (“DPO”). The following table presents the components of the cash conversion cycle for our Technology business: 40 Table of Contents As of June 30, 2023 2022 (DSO) Days sales outstanding (1) 62 59 (DIO) Days inventory outstanding (2) 32 30 (DPO) Days payable outstanding (3) (46 ) (45 ) Cash conversion cycle 48 44 (1) Represents the rolling three-month average of the balance of trade accounts receivable-trade, net for our technology business at the end of the period divided by Gross billings for the same three-month period. (2) Represents the rolling three-month average of the balance of inventory, net for our technology business at the end of the period divided by the direct cost of products and services billed to our customers for the same three-month period. (3) Represents the rolling three-month average of the combined balance of accounts payable-trade and accounts payable-floor plan for our technology business at the end of the period divided by the direct cost of products and services billed to our customers for the same three-month period. Our cash conversion cycle increased to 48 days as of June 30, 2023, as compared to 44 days as of June 30, 2022. Our standard payment term for customers is between 30-60 days; however, certain customer orders may be approved for extended payment terms. Our DPO increased 1 day as of June 30, 2023. Invoices processed through our credit facility, or the A/P-floor plan balance, are typically paid within 45-60 days from the invoice date, while A/P trade invoices are typically paid within 30-60 days from the invoice date. Our DSO increased 3 days to 62 days as of June 30, 2023, compared to June 30, 2022, reflecting higher sales to customers with terms greater than or equal to net 60 days. Our DIO increased to 32 days as of June 30, 2023, compared to 30 days as of June 30, 2022. Financing segment : For the three months ended June 30, 2023, our financing segment provided $27.4 million from operating activities, primarily due to an increase in accounts payable-trade offset by increases in financing receivables-net. In the three months ended June 30, 2022, our financing segment provided $1.7 million from operating activities, primarily due to net earnings, decreases in accounts receivable, and increases in accounts payable-trade offset by increases in financing receivables-net. Cash flows related to investing activities : For the three months ended June 30, 2023, we used $63.1 million from investing activities, consisting of $59.6 million for the acquisition of NSG, and $3.7 million for purchases of property, equipment and operating lease equipment offset by $0.2 million of proceeds from the sale of property, equipment, and operating lease equipment. For the three months ended June 30, 2022, we used $1.7 million from investing activities, consisting of $1.8 million for purchases of property, equipment and operating lease equipment offset by $0.1 million of proceeds from the sale of property, equipment, and operating lease equipment. Cash flows from financing activities : For the three months ended June 30, 2023, cash provided by financing activities was $82.6 million, consisting of net borrowings of non-recourse and recourse notes payable of $56.4 million, net borrowings on the floor plan component of our credit facility of $32.3 million, and proceeds of issuance of common stock to employees under an employee stock purchase plan of $1.4 million, partially offset by $7.5 million in cash used to repurchase outstanding shares of our common stock. For the three months ended June 30, 2022, cash provided by financing activities was $31.1 million, consisting of net borrowings of non-recourse and recourse notes payable of $45.6 million, partially offset by $7.2 million in cash used to repurchase outstanding shares of our common stock and $7.3 million in net repayments on the floor plan component of our credit facility. Our borrowing of recourse and non-recourse notes payable primarily arises from our financing segment when we transfer contractual payments due to us under lease and financing agreements to third-party financial institutions. When the transfers do not meet the requirements for a sale, the proceeds paid to us represent borrowings of non-recourse or recourse notes payable. 41 Table of Contents Non-cash activities : We transfer contractual payments due to us under lease and financing agreements to third-party financial institutions. In certain assignment agreements, we may direct the third-party financial institution to pay some of the proceeds from the assignment directly to the vendor or vendors that have supplied the assets being leased or financed. In these situations, the portion of the proceeds paid directly to our vendors are non-cash transactions. SECURED BORROWINGS – FINANCING SEGMENT We may finance all or most of the cost of the assets that we finance for customers by transferring all or part of the contractual payments due to us to third-party financing institutions. When we account for the transfer as a secured borrowing, we recognize the proceeds as either recourse or non-recourse notes payable. Our customers are responsible for repaying the debt from a secured borrowing. The lender typically secures a lien on the financed assets at the time the financial assets are transferred and releases it upon collecting all the transferred payments. We are not liable for the repayment of non-recourse loans unless we breach our representations and warranties in the loan agreements. The lender assumes the credit risk and their only recourse, upon default by the customer, is against the customer and the specific equipment under lease. While we expect that the credit quality of our financing arrangements and our residual return history will continue to allow us to obtain such financing, such financing may not be available on acceptable terms, or at all. Interest rates have been rising and may continue to rise. To preserve our expected internal rate of return, we generally quote rates that are indexed. Some of our lenders will not commit to rates for a length of time, resulting in exposure to us if the rates rise and we cannot pass such exposure to the customer. CREDIT FACILITY – TECHNOLOGY BUSINESS We finance the operations of our subsidiaries e Plus Technology, inc., e Plus Technology Services, inc. and SLAIT Consulting, LLC (collectively, the “Borrowers”) in our technology business through a credit facility with WFCDF. The WFCDF Credit Facility has a floor plan facility and a revolving credit facility. Please refer to Note 8 “Notes Payable and Credit Facility” to the accompanying Consolidated Financial Statements included in “Part I, Item 1. Financial Statements” for additional information concerning our WFCDF Credit Facility. The loss of the WFCDF Credit Facility could have a material adverse effect on our future results as we currently rely on this facility and its components for daily working capital and liquidity for our technology business and as an operational function of our accounts payable process. Floor plan facility : We finance most purchases of products for sale to our customers through the floor plan facility. Once our customer places a purchase order with us and we have approved their credit, we place an order for the desired products with one of our vendors. Our vendors are generally paid by the floor plan facility and our liability is reflected in “accounts payable—floor plan” in our consolidated balance sheets. Most customer payments to us are remitted to our lockbox accounts. Once payments are cleared, the monies in the lockbox accounts are automatically and daily transferred to our operating account. We pay down the floor plan facility on three specified dates each month, generally 30-60 days from the invoice date. Our borrowings and repayments under the floor plan component are included in “net borrowings (repayments) on floor plan facility” within cash flows from the financing activities in our consolidated statements of cash flows. As of June 30, 2023, and March 31, 2023, we had a maximum credit limit of $500.0 million, and an outstanding balance on the floor plan facility of $182.9 million and $134.6 million, respectively. On our balance sheet, our liability under the floor plan facility is presented as part of accounts payable – floor plan. Revolving credit facility : The outstanding balance under the revolving credit facility is presented as part of recourse notes payable- current on our consolidated balance sheets. Our borrowings and repayments under the revolving credit facility are included in “borrowings of non-recourse and recourse notes payable” and “repayments of non-recourse and recourse notes payable,” respectively, within cash flows from the financing activities in our consolidated statements of cash flows. 42 Table of Contents As of June 30, 2023, the outstanding balance under the revolving credit facility was $52.0 million. On our balance sheet, our liability under the revolving credit facility is presented as part of recourse notes payable – current. As of March 31, 2023, we did not have any outstanding balance under the revolving credit facility. The maximum credit limit under this facility was $200.0 million as of both June 30, 2023, and March 31, 2023. PERFORMANCE GUARANTEES In the normal course of business, we may provide certain customers with performance guarantees, which are generally backed by surety bonds. In general, we would only be liable for these guarantees in the event of default in the performance of our obligations. We are in compliance with the performance obligations under all service contracts for which there is a performance guarantee, and we believe that any liability incurred in connection with these guarantees would not have a material adverse effect on our consolidated statements of operations. OFF-BALANCE SHEET ARRANGEMENTS As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements, or other contractually narrow or limited purposes. As of June 30, 2023, we were not involved in any unconsolidated special purpose entity transactions. ADEQUACY OF CAPITAL RESOURCES The continued implementation of our business strategy will require a significant investment in both resources and managerial focus. In addition, we may selectively acquire other companies that have attractive customer relationships and skilled sales and/or engineering forces. We may also open facilities in new geographic areas, which may require a significant investment of cash. We may also acquire technology companies to expand and enhance our geographic footprint, or the platform of bundled solutions to provide additional functionality and value-added services. We may require additional capital due to increases in inventory to accommodate our customers’ IT installation schedules. We may continue to use our internally generated funds to finance investments in leased assets or investments in notes receivable due from our customers. These actions may result in increased working capital needs as the business expands. As a result, we may require additional financing to fund our strategy, implementation, potential future acquisitions, and working capital needs, which may include additional debt and equity financing. While the future is uncertain, we do not believe our WFCDF Credit Facility will be terminated by WFCDF or us. Additionally, while our lending partners in our financing segment have become more discerning in their approval processes, we currently have funding resources available for our transactions. POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS Our future quarterly operating results and the market price of our common stock may fluctuate. In the event our revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of our common stock. Any such adverse impact could be greater if any such shortfall occurs near the time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing and financing companies, IT resellers, software competitors, or our major customers or vendors of ours. Our quarterly results of operations are susceptible to fluctuations for a number of reasons, including, but not limited to currency fluctuations, reduction in IT spending, shortages of product from our vendors due to material shortages, any reduction of expected residual values related to the equipment under our leases, the timing and mix of specific transactions, the reduction of manufacturer incentive programs, and other factors. Quarterly operating results could also fluctuate as a result of our sale of equipment in our lease portfolio to a lessee or third-party at the expiration of a lease term or prior to such expiration, and the transfer of financial assets. Sales of equipment and transfers of financial assets may have the effect of increasing revenues and net income during the quarter in which the sale occurs and reducing revenues and net income otherwise expected in subsequent quarters. See Part I, Item 1A, “Risk Factors,” in our 2023 Annual Report, as supplemented in subsequently filed reports, and in Part II, Item 1A. “Risk Factors” in this Report. 43 Table of Contents We believe that comparisons of quarterly results of our operations are not necessarily meaningful and that results for one quarter should not be relied upon as an indication of future performance. CRITICAL ACCOUNTING ESTIMATES As disclosed in Note 2 , “Recent Accounting Pronouncements,” we adopted a new standard on accounting for contract assets and contract liabilities from contracts with customers in a business combination in the second quarter of our fiscal year 2023. Under this new standard, we apply Accounting Standards Codification Topic 606, Contracts with Customers, to recognize and measure contract assets and contract liabilities from contracts with customers. Other than this change, our critical accounting estimates have not changed from those reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report.