Safe Harbor Statement

 

This transcript of the earnings call that occurred on May 22, 2019, contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act,” and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements are not based on historical fact but are based upon numerous assumptions about future conditions that may not occur. Forward-looking statements are generally identifiable by use of forward-looking words such as “may,” “should,” “intend,” “estimate,” “will,” “potential,” “could,” “believe,” “expect,” “anticipate,” “project,” and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements are made based upon information that is currently available or management’s current expectations and beliefs concerning future developments and their potential effects upon us, speak only as of the date of the earnings call, and are subject to certain risks and uncertainties. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Our ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the matters set forth below:

 

• ·national and international political instability fostering uncertainty and volatility in the global economy including exposure to fluctuations in foreign currency rates interest rates, and downward pressure on prices;
• domestic and international economic regulations uncertainty;
• exposure to changes in, interpretation of, or enforcement trends in legislation and regulatory matters;

   

• managing a diverse product set of solutions in highly competitive markets with a number of key vendors;
• increasing the total number of customers using integrated solutions by up-selling within our customer base and gaining new customers;
• adapting to meet changes in markets and competitive developments;
• maintaining and increasing advanced professional services by recruiting and retaining highly skilled, competent personnel and vendor certifications;
• increasing the total number of customers who use our managed services and professional services and continuing to enhance our managed services offerings to remain competitive in the marketplace;
• performing professional and managed services competently;
• maintaining our proprietary software and updating our technology infrastructure to remain competitive in the marketplace;
• reliance on third parties to perform some of our service obligations to our customers.
• ·our dependence on key personnel to maintain certain customer relationships, and our ability to hire, train and retain sufficient qualified personnel;
• ·our ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration and other key strategies;
• a possible decrease in the capital spending budgets of our customers or a decrease in purchases from us;
• ·our ability to protect our intellectual property rights and successfully defend any challenges to the validity of our patents, or allegations that we are infringing upon any third-party patents, and the costs associated with those actions, and, when appropriate, license required technology;
• the creditworthiness of our customers and our ability to reserve adequately for credit losses;
• the possibility of goodwill impairment charges in the future;
• changes in the IT industry and/or rapid changes in product offerings, including the proliferation of the cloud, infrastructure as a service and software as a service, and our dependency on continued innovations in hardware, software and services offerings by our vendors and our ability to partner with them;
• ·our contracts may not be adequate to protect us, and we are subject to audit in which we may not pass, and our professional and liability insurance policies coverage may be insufficient to cover a claim;
• future growth rates in our core businesses;
• significant adverse changes in, reductions in, or loss of our largest volume customer or one or more of our large volume customers or vendors;
• reduction of vendor incentives provided to us;
• failure to comply with public sector contracts or applicable laws;
• ·our ability to secure our own and our customers’ electronic and other confidential information, and remain secure during a cyber-security attack;
• ·our ability to raise capital, maintain or increase as needed our lines of credit with vendors or floor planning facility, or obtain debt for our financing transactions or the effect of those changes on our common stock or its holders;
• changes to or loss of members of our senior management team and/or failure to successfully implement succession plans;
• disruptions or a security breach in our or our vendors’ IT systems and data and audio communications networks;
• ·our ability to realize our investment in leased equipment;
• ·our ability to successfully perform due diligence and integrate acquired businesses; and
• significant changes in accounting standards including changes to the financial reporting of leases which could impact the demand for our leasing services, or misclassification of products and services we sell resulting in the misapplication of revenue recognition policies or inaccurate costs and completion dates for our services which could affect our estimates.

 

We cannot be certain that our business strategy will be successful or that we will successfully address these and other challenges, risks and uncertainties. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in the Form 10-K for the year ended March 31, 2019, as well as other reports that we file with the SEC.

 

This document may also contain non-GAAP financial information. Management uses this information in its internal analysis of results and believes that this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period-to-period comparisons. For a reconciliation of non-GAAP measures presented in this document, see our earnings press release issued May 22, 2019, a copy of which is posted on our website at www.eplus.com/investors.

 

May 22, 2019 – FY19Q4

 

Prepared Remarks

 

Operator

 

Good day, ladies and gentlemen. Welcome to the ePlus Earnings Results Conference Call. As a reminder, this conference call is being recorded.

 

I would like to introduce your host for today's conference, Mr. Kley Parkhurst, SVP.  Sir, you may begin.

 

Kleyton L. Parkhurst, SVP

 

Thank you for joining us today.  On the call is Mark Marron, CEO & President, and Elaine Marion, Chief Financial Officer.

 

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 & Exchange Commission including our form 10-K for the year ended March 31, 2018, and our form 10-K for the year ended March 31, 2019, when filed.  The Company undertakes no responsibility to update any of these forward-looking statements in light of new information or future events.  In addition, during the call we may make reference to non-GAAP financial measures and we have 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, CEO & President

Thanks Kley, and thank you everyone for participating in today’s call to discuss our fourth quarter and full year fiscal 2019 results and accomplishments.

 

I will start with an overview of fourth quarter results, do a deeper dive into the business trends that drove our fiscal 2019 performance and then provide additional color on our thinking heading into this new fiscal year.

 

First to our fourth quarter results, in which we reported strong growth in adjusted gross billings of 6.8%.  The gross billings to net sales adjustment was 33.7% in the quarter, representing a 580 bp increase versus last year’s 27.9% and up from 23.2% just a few years ago.  By contrast, net sales declined 1.3% due to industry trends that we have been discussing over the last several quarters, namely:  the transition to “as a service” and ratably recognized revenue. We are seeing higher contributions from software, maintenance and subscription-based solutions that are recognized on a net basis, along with our push to drive more optimized or annuity services that are recognized ratably.

 

Consolidated gross margin reached 25% in the quarter, up 30 basis points year-on-year.  Lower technology segment comparisons with last year’s fourth quarter were more than offset by improved financing segment margins.  Excluding the gross to net impact, this was a difficult quarter for product margins as we had a tough compare with last year and also had several deals at lower margins as part of our “Land and Expand” initiative.   With that said, we have continued to expand our customer base, which provides us with the ability to upsell and cross sell our solutions and services.

 

As we continue to expand the life cycle services, we provide our customers, we are now breaking out our services revenue, which accounted for almost 14% of fourth quarter revenues, up 22.8% over the same period last fiscal year.

 

Fiscal 2019 was a successful year for ePlus across a number of key metrics, including growth in adjusted gross billings, services revenue, gross margin, net income and EPS.

 

 

There are three key takeaways I would like to focus on –

• We grew our services business nicely and are now disclosing services revenues and costs;
• We increased our gross margin; and
• We invested in our business, both organically and via acquisition to support future growth.

All of this has come together to further strengthen our market positioning, even from where we were one-year ago. 

 

Let me provide additional color on each of the three areas:

1. First, growth in our services business. Our services revenues’ have increased at a CAGR of just under 24% over the last 3 years, and we believe our services gross margins are very strong compared to many of our industry peers.We will continue to expand our consultative and advisory services along with optimized services that monitor and manage our customers’ IT infrastructures. At the same time, we are providing staffing resources to support what our customers are trying to accomplish, enabling them to focus on their core business. This allows us to stay close to our customers, while a portion of this provides annuity quality revenue to our base of business. In addition, this year’s reclassification from gross to net was approximately $590 million. Keep in mind that this provides us with important renewal opportunities, as it relates to subscription-based software and maintenance contracts---giving us an additional source of annuity like revenues.
2. Second, we continue to see gross margin improvement. For Fiscal 2019, our consolidated gross margin reached an industry leading 24.1%, up 130 basis points year-on-year. We believe this demonstrates the value that our clients place in the customized solutions that we are providing, particularly in our key focus areas of cloud, security and digital infrastructure. Additionally, gross margin benefitted from the expansion of our services portfolio and the flexibility and margin of our financing business, which is a key competitive differentiator for ePlus.

    

3. Finally, Investment in our business.We continue to invest in customer facing headcount and the expansion of our solutions and service offerings, along with broadening our reach to support our enterprise, mid-market, and SLED customer base. Along those lines, the acquisition of SLAIT in late January expanded our geographic footprint and service offerings, while extending our security consulting and managed service capabilities.

 

It is important to note that we are continuing to see our industry transition to solutions sold on a subscription or ratable basis.  While this trend started several years ago, we have seen it accelerating over the last twelve months. Our vendors are increasingly transitioning to this model and many of our customers prefer purchasing this way. Thanks to our size and the scope of our operations, ePlus is well-positioned to support our customer base with many innovative consumption models they may prefer.  This gives us the opportunity to leverage our financing arm, which is a significant competitive advantage for ePlus as compared to our peers, given our extensive underwriting experience financing a wide array of IT products, services, and software assets.

 

Also, security continues to be a significant area of focus for ePlus and its customers.  Security products and services represented nearly 20% of our adjusted gross billings for fiscal 2019.  Security remains a top of mind for many CIOs within our customer base.

 

I will now turn the call over to Elaine to discuss the financial results of the fourth quarter and our fiscal 2019.

 

Elaine Marion, CFO

Thank you, Mark, and thank you, everyone, for joining our call. Let me give you some detailed overview of our financial performance in the fourth quarter and full fiscal year 2019.

 

Starting with the quarterly results, our consolidated net sales amounted to $325.4 million, 1.3% below the $329.9 million reported in the fourth quarter of fiscal 2018, mainly due to a higher percentage of third-party software subscriptions and maintenance sales recorded on a net basis. 

 

Adjusted gross billings amounted to $472.4 million, a 6.8% increase compared to $442.5 million in the same period a year ago, reflecting strong demand for our products and services. The adjustment from adjusted gross billings to net sales was 33.7% in the fourth quarter of 2019, compared to 27.9% in the year ago quarter, reflecting a higher portion of third-party software subscriptions and maintenance sales.  In our Technology segment, our service revenues increased to $45.0 million or 22.8% in the quarter due to an increase in managed services and staff augmentation.  Our services include revenues from professional services, managed services and staff augmentation. 

 

Our financing segment had revenue growth of 14.2% to $12.3 million, compared to $10.7 million in the fourth quarter of fiscal 2018, reflecting higher transactional gains.

 

While gross profit was essentially flat at $81.3 million, our consolidated gross margin expanded 30 basis points to 25.0%, mainly due to the increase in sales recorded on a net basis, and an increase in service revenues and gross profit in the Financing segment.  Gross margin in the Technology segment declined 10 basis points to 22.7% due to a less favorable mix of products and services.  We had several large competitively priced product orders and had a shift in services to staff augmentation and enhanced maintenance services which yielded lower margins than professional services.  Staff augmentation and EMS offer more consistent revenue streams and help build annuity quality revenues.  Offsetting this was a positive impact on margins from an increase in gross to net reclass.

 

Operating expenses for the quarter amounted to $66.8 million, representing 5.8% increase from $63.1 million. This is mainly attributable to an 3.9% increase in salaries and benefits as a result of higher headcount, primarily due to the acquisition of SLAIT Consulting and an increase in healthcare costs.  Please note that our total headcount at the end of March 2019 amounted to 1,537, compared to 1,260, due to the acquisition that I just mentioned, which brought on 256 professionals.  Our G&A expenses increased mainly due to the SLAIT acquisition. As a result of higher SG&A, as well as an increase in acquisition-related amortization, operating income for the quarter declined 21.8% to $14.5 million, from $18.5 million in the comparable quarter last year.

 

Other income was $5.6 million for the quarter primarily due to distributions from a bankruptcy case. 

 

Our tax rate for the quarter was 24.8% compared to 51% in the year ago quarter.  Last year’s quarter contained an adjustment from the remeasurement our deferred tax assets and liabilities relating to the Tax Cuts and Jobs Act.

 

Our consolidated net earnings were $15.1 million, or $1.12 per diluted share, compared to $8.9 million or $0.65 per share last year.

 

Non-GAAP diluted earnings per share were $1.03 compared to $1.06 in the fourth quarter of fiscal 2018. Our diluted shares outstanding totaled 13.5 million for the quarter, compared to 13.8 million at the end of fiscal 2018, as we repurchased 185 thousand shares for a total of $14.1 million.

 

 

Now let me briefly summarize our financial results for the full fiscal year 2019. Our net sales reached $1.37 billion, 3.3% below the $1.42 billion reported in fiscal 2018. Technology segment net sales decreased 3.2% to $1.33 billion and net sales in our Financing segment decreased 6.3% to $43.2 million due to lower post contract revenues.  Net sales decreased in the technology segment primarily due to an increase in sales reported on a net basis.  Adjusted gross billings for the full year increased to $1.92 billion compared to $1.90 billion in fiscal year 2018 despite the large competitively bid project that was partially completed last year.

Looking at our end-markets in our technology segment for fiscal 2019, Technology and SLED were once again our largest markets, representing 22% and 17% of segment net sales, respectively. Healthcare and Financial services each represented 15%, while Telecom, Media & Entertainment accounted for 13%. The remaining 18% is attributed to certain smaller client types we classify as other.

 

Gross profit for fiscal 2019 was up 2.1% and amounted to $330.4 million. Consolidated gross margin was 24.1%, representing a 130 basis point expansion from fiscal 2018 due to a more favorable mix of products and services.  Service revenue increased 15.4% over last year. Gross profit in the financing segment decreased $470 thousand to $35.7 million.

 

Other income of $6.7 million included distributions from claims in a bankruptcy.  Our tax rate for fiscal year 2019 was 26.7% as compared to 34.3%.  Net earnings increased 14.6% to $63.2 million, and fully diluted earnings per share were $4.65, up 17.7%.  Non-GAAP earnings per diluted share was $5.12, compared to $5.04 in fiscal year 2018. 

 

Moving to the balance sheet, we ended the year with cash and cash equivalents of $79.8 million, compared to $118.2 million at the end of fiscal 2018.  The decrease was primarily due to $50 million paid for the SLAIT acquisition in January 2019 and $14.1 million spent to repurchase our stock. Our net inventory increased 26.7% year-on-year, due to an increase in projects underway for specific customers. Current deferred revenue increased by 32.5% to $47.3 million, primarily due to our managed and professional services service offerings.

For modeling purposes for fiscal year 2020, we expect our effective tax rate to be between 28% and 29% and expect intangible amortization expense to be approximately $9.8 million for the year.

  

Going forward, our capital allocation strategy remains the same: pursue growth opportunities both organic and through acquisitions, and share repurchases. We will continue to focus on adding capabilities in the faster growing segments of the market and believe we are well positioned to outpace the overall IT market growth for the foreseeable future.

 

Thank you for your time today. I will now turn the call back over to Mark. 

 

Mark Marron, CEO & President

Thanks Elaine.

 

While less favorable products mix impacted our fourth quarter year-on-year comparisons, one quarter does not make the trend.  We are very pleased with our positioning heading into FY 2020 as market demand remains positive and we have made focused investments in the solution areas necessary to capture opportunities.  Many of our customers are involved in business model transformation, adopting digital infrastructures, multi-cloud environments, IOT, and utilizing AI and data analytics to drive efficiencies in their internal IT as well as improving their own customer experience.  And, virtually all of our customers consider security as the number 1 threat to their businesses.  In each of these areas, ePlus has the right solution, whether it be integrating leading vendor’s products and services, or providing professional or managed services, all in an advisory approach delivered by our consultants.    We are currently serving over 3,400 middle market, enterprise and SLED customers, and we have the resources to drive organic growth as well as to take advantage of acquisition opportunities that present the right fit. 

We continue to execute effectively on the key elements of our strategy—namely,

• growing our services revenues, which have been increasing at a significant double-digit rate;
• increasing our security products and services, which now account for approximately 20% of our business; and
• completing acquisitions that are building out our capabilities and footprint.

We believe we are well positioned in a market that continues to evolve and transform.  Going forward we expect to balance our growth initiatives with actions to optimize product mix and cost structure, while providing the solutions and services our customers’ need in the way they want to consume them.

 

I will now open the call for questions. Operator?

Question-and-Answer

Operator

[Operator Instructions] Our first question comes from Maggie Nolan with William Blair. Your line is now open.

Maggie Nolan – William Blair

I wanted to dive into kind of that last comment that you just made Mark, when you're talking about balancing growth initiatives to optimize product mix. What does an optimized product mix look like to you all? And what are some of the things you can do to kind of achieve that and better balance it as you said?

Mark Marron, CEO & President

Well, there's a few things there Maggie. So, one as you know in our prior calls we've talked about continued to expand our customer facing headcount. So, in terms to get the productivity piece of that, it would be getting those sales reps and service engineers up to speed quicker and delivering results.

On the optimized side, there are some things that we've looked at within our expense structure that we think over time, we should be able to get some operating leverage. And then the second, or third piece of that I guess I should say would be services. We think over time we'll continue to get operating leverage within our services business, specifically our annuity services, where revenue should continue to trend up, where expenses don't keep up at the same state - at the same pace.

Maggie Nolan – William Blair

And then I'm really happy to see that breakout of products and services, I think that'll be really informative going forward. Obviously there's a little bit of variability there in terms of just my initial calcs with the margin, gross margin profile look like this quarter, the same quarter last year, this year versus last year. So, can you give us an expectation of what you would consider to be a kind of a normalized range for gross margin for both products and then for services as well?

Mark Marron, CEO & President

So, here are a couple of different things Maggie, to give you a feel. So, if you look at our services and we talked about it, which is I think Elaine and I are relieved that we're actually starting to break it out, which will make the conversations easier.

Our services for this quarter were up at 22.8% growth rate and well 14% of our overall revenues for the quarter. What's nice about our services though over the last three years, we've had a CAGR of 24% and more importantly our annuity services are more than double that in terms of the CAGR over the last three years.

Now to your question that gets a little bit harder in terms of giving you a true margin mix, is what we saw this quarter is, we had some increase in our staffing services that are traditionally at a lower margin than our professional services. And then what's interesting about annuity is, as I mentioned a little bit earlier is, as we continue to drive those revenues up, the expenses won't keep up, so those blended margins should continue to go up. So, if I had to put a ballpark on it, in the 38% to 40% range, if I had to put a ballpark on it - overall blended services are clear.

Maggie Nolan – William Blair

And then I'm wondering if I heard you properly so I heard some mention of the land and expand approach it seems like maybe some of that hit in the fourth quarter here. And then Elaine you also mentioned on - mentioned some competitively - some large competitively priced product order. So, is there a larger project kind of ramping up now and can we expect that to contribute in 2020? Am I interpreting that properly?

Mark Marron, CEO & President

Yes, well. Yes, you no Maggie. So, I'll start off and then if Elaine wants to jump in, is what we saw was we actually had a really tough compare on our product margins over the last year. So, that was one of the factors that affected our gross - I should say our GP for this quarter. And then we did have a few nice sized deals that we used our land and expand, where we were aggressively going in, to win the deal and, and then over time, we think the margins will go up.

So, we'll continue to do that. Ballpark we were up a 175, 180 customers year-on-year. So, what we like about that is, we're building up our customer base, that we can continue to go back and upselling, cross-sell all the different services and solutions that we're focused on.

Elaine Marion, CFO

Yes, Maggie, just to add to that. One thing that impacts our product margin, that you see on now the income statement is that growth to net variance and that does swing quarter-to-quarter depending on what that product mix is. So, there's two things that impact product margins. One is the actual no margin that we sell the product for, but two is that gross to net impact.

And we said this quarter that it was up quite a bit on a quarter-over-quarter basis 580 basis points over last year's quarter. So that, while the product margins were impacted by the large competitively priced product transaction negatively, they grow to net impact improved margins. So, you're seeing kind of an offset there.

Maggie Nolan – William Blair

And then just one more quick one if I can. A little more color on kind of preliminary outlook of 2020. Is this a year, where we continue to focus on gross margin expansion? Do you expect to see revenue growth come back a little bit? How should we be thinking about this upcoming year here?

Mark Marron, CEO & President

So, customer demand is still solid, Maggie. We haven't seen any slowdowns and feel good, where we look so far through the quarter and where the year looks. If I had a look at it, where it gets a little bit tougher on the sales growth. If you look at I'd never thought we'd have 34% in terms of gross to net from an adjustment to 580 basis point that Elaine talked about from an increase.

So, I think if that continues and as our software subscription licensing continues to grow, which has also taken out of net, I think that'll be tough on the top-line. I think as we expand our services and some other things, we should see some uptick in the gross margin. Yes, in the gross margin, but also want to be very clear here.

Our gross margins for this quarter were 25% and when I look at the year, we were at 24.1%, which was up 130 basis points of over last year. So, there's not a lot of, - I don't think it would be a big uptick as it relates to gross margins, but customer demand look like solid.

Maggie Nolan – William Blair

And not a big uptake - uptick related to that 25% that you exited the year at, or related to that 24% for the full year?

Mark Marron, CEO & President

Well, yes, I think you got to start at the 24% Maggie, because you've got to look at - I would look at each of the quarter's last year and not see a solid uptick in, as it relates to gross margin. What I would stress is something that we've talked to in other calls. I would focus on gross profit so that's really what we're focused on driving that gross margin and topline is obviously important.

But we're trying to - we've moved away from the commodity sales, we're trying to draw out more of the solutions that are value add to the customers that they're willing to pay more for and drive the services both consultative as well as annuity. So, it's really about the GP is what we're focused on.

Operator

Our next question comes from Greg Burns with Sidoti. Your line is now open.

Greg Burns - Sidoti

Just going back to the split out now with the services piece, you talked about the three-year CAGR of around 24%. But going forward is that kind of how you think of that business growing prospectively?

Mark Marron, CEO & President

I think that gets a little bit tougher, just normal math as the numbers get bigger. I think it'll be tougher to kind of keep up with that percentage. With that said, we do expect services to continue to grow and be a big contributor to our gross profits, as we go forward because as we move more into the consultative and provide more annuity services for our customers across cloud, security and digital, we think there's opportunity within our existing customer base and net new customers.

 

 

Greg Burns - Sidoti

And then in terms of the land and expand, I guess, what dictates - I guess your willingness to accept lower margins. Like is there a, is a certain size of the deal, like a prospective size of the deal or maybe historically. Can you give us a little idea of like how this has worked out in the past? Maybe you accepted lower margins on some upfront sales and what you were able to accomplish by winning that customer through that land and expand strategy?

Mark Marron, CEO & President

Yes. So you know, Greg. So, first of all it's not like we're just making any deals at any margin, it's really strategic accounts. So, accounts that we've identified or regional vice presidents in the field have come to us that they feel is a strategic account for them to win within their region.

And then secondly, is that they have an IT budget that is substantial that we would then be able to go back in and after providing something that, let's say, a lower margin be able to go back in and provide all the consultative and annuity services and other solutions that we have, to kind of drive those margins up.

So, it's mainly focused on strategic accounts that are identified either at the national or at the regional level. It's not - we track it by the way we have systems in place for deals based on a certain size, not to go below a certain margin, have to actually go up from our COO to get approval. But it's mainly on strategic accounts, we think we can then grow to be substantial accounts for ePlus.

Greg Burns - Sidoti

And then security, what percent of adjusted gross billings was that this quarter? And what was the growth rate?

Mark Marron, CEO & President

It was 19.3% I believe is what it was and last year it was like 18. - I want to say 18.6%

Elaine Marion, CFO

That was for the year, right.

Mark Marron, CEO & President

For the year--

Elaine Marion, CFO

But for the quarter it was 20.6%.

Mark Marron, CEO & President

20.6% okay. 20.6% Greg.

Greg Burns - Sidoti

And then lastly, you talked about investing in the customer facing assets and headcount. Could you give us an idea of what the current utilization rate is now, or a sense of kind of your capacity, your existing capacity and maybe the need to add there? And how do you determine, when new assets need to be added? Thanks.

Mark Marron, CEO & President

Yes, I got you now. Hey Greg, that's kind of a broad question, so there's a few things that kind of go into it. So, I'll give you a little historical and then I'll try to address what you're saying. So, we've made investments that we believe have paid off and I'll give you just a couple. One, one of our strategic initiatives was to expand our geographic reach and our customer base and we've done that.

Second is; was to build out our service capabilities and our offerings that we talk about. And you heard, it was up 22.8% for the quarter and there's a CAGR of 24% over the last three years. Years ago we invested in a small security company and said that we were going to build up our security expertise and right now, it's almost approximately one-fifth of our overall adjusted gross billings in our business.

And the third was; we were going to sell or fourth I should say, was going to sell solutions that were going to increase our gross margins and for this quarter it was 25%, for the year it was 24.1%.

So, we feel good that we're making the right investments. We also feel that we're in a space now, we're at a size and scale that we can continue and invest in customer facing headcount both from a sales and services because, our customer base is growing. And over time we're going to look to get that operating leverage, whether it be from a costs perspective or more importantly hopefully from a productivity perspective. Did that give you what you were looking for?

Greg Burns - Sidoti

Yes. And I guess, when you do add that headcount, how do you determine - what's I guess full capacity? How quickly do they get ramped up to scale and maybe with your existing tax and sales and how much more growth, - how much utilization are you getting out of them now? I guess what I'm trying to get it.

 

 

Mark Marron, CEO & President

Okay utilization, so yes we've got - I'll call them quotas and processes in place. So, both from a sales as well as from a services perspective there is a certain productivity that's expected. But as you can imagine, whether it's on the sales or services side, it's normally a quarter or so, before people ramp up and we kind of track that religiously.

So, we've got reports that actually track from our top reps to our bottom rep. What type of GP they've driven and what areas they've driven it, and it is hitting the expected targets and goals. And then we have utilization that we track both for our pre-sales as well as post-sales resources.

Greg Burns - Sidoti

Okay. Thank you.

Mark Marron, CEO & President

No problem. Hey Greg that's one thing we do have tracked pretty tightly, you can count on that.

Operator

[Operator Instructions] Our next question comes from Matt Sheerin with Stifel. Your line is now open.

Matt Sheerin - Stifel

Just another question on the gross margin, I mean I know it was 25%, but it was down a little bit on the technology side. You talked about the mix there and the fact that there are some competitive deals. As you look at your pipeline over the next quarter or two, I mean, you're still looking at that land and expand strategy, where you may give up a little bit of margin, adjusted to win business, and establish those relationships. So, Kley, you know, in Maggie's question you talked about maybe a gross margin sort of stabilizing from here. I mean is that one of the reasons?

Mark Marron, CEO & President

Well not, I don't know if that's one of the reasons Matt. The reason I was somewhat conservative with Maggie, as when you look at it at 24.1% gross margins and 25% for the quarter, pretty much I believe it's some of the highest in the industry.

So, we're in that phase of continue to build out the solutions and services, so that we believe it potentially could uptick, yes. But we've had to give you a feel over last two years I think our gross margins have grown 250 basis points, right. So, I just don't think it's realistic to think that, that will continue.

Do we have landed - to your question, do we have land and expand deals? Yes, we always have them in the pipeline. But realize those are deals that we've got to go in. We've got to build the customer relationship that, we don't have, we have to provide some type of value, not just price that the see a reason to invest in us, as they go forward. So, there will always be there, but there's nothing specific that I know of right this minute that's going to happen.

Matt Sheerin - Stifel

And then so your - can you talk about the contribution from that SLAIT acquisition. I know they're focused on services, so whether the billings growth or other metrics, so we can sort of back that out and look at your organic numbers in the quarter?

Mark Marron, CEO & President

So, from an adjusted gross billing approximately 50% of the upside on the adjusted gross billings was from SLAIT and the rest was organic Matt. But like anything with most of the acquisitions, they take time from when we require, they get settled in and for us to see the true upside.

What I will tell you about SLAIT that we're kind of excited is, we've talked about expanding our geographic coverage in our technical expertise and SLAIT actually gives us both with - with that acquisition we believe we're the dominant player in the mid-Atlantic.

The other thing is they had SLED relationships and contracts, that we're going to be able to leverage across the rest of ePlus in those regions. And then on top of that, they had some security expertise and programs that we believe we're going to be able to build out our security revenues and capabilities, in addition to having a nice staffing business that we're going to add to the existing staffing business we're doing.

So, it's a nice - we believe it's a nice add for us. But like all acquisitions, you start to see the return in subsequent quarters more and more, as they get to know ePlus and all the offerings.

Matt Sheerin - Stifel

And then, as you look at, just the spending environment, we're hearing from some of the storage players Pure last night and then NetApp tonight. It sounds like there's some push outs, some big deals is also concern about tariffs. And we're also seeing increase in tariffs on networking equipment like Cisco and others. Are you seeing any impact there on the demand front, or customers pausing at all?

Mark Marron, CEO & President

No. So, two different things. One we haven't. So, your first question with the storage play and just overall, we haven't seen any - any drop off in our pipeline or forecasts or customer demand. In fact customer demand is fairly solid from what we've seen so far. On tariffs it's still little early.

Now there's two things that can come into play with that Matt. It could either potentially pull a deal forward, if the vendor hasn't implemented tariffs and you could pull it into this quarter or if they have implemented tariffs, you may have some customers that may wait and see to see if those tariffs are going to go away.

But so far I've not heard anything or seen anything through - well, through our first half of our quarter effectively. And haven't heard anything from our sales leaders that is holding up a deal or bringing a deal forward just yet.

Operator

And our next question comes from Brett Knoblauch with Berenberg Capital Markets. Your line is now open.

Brett Knoblauch – Berenberg Capital Markets

I guess just a couple of things. Just on the SLAIT acquisition, I guess, was that, I know when you initially announced, so the debt dilutive, was that kind of in the range, what you are expecting? I mean actually is that have anything to do with the year-over-year decrease in gross profit? Was that solely due to the kind of price projects and tough comp in terms of product mix?

Mark Marron, CEO & President

Brett, I apologize you broke up a little, so I'm not sure what your question was. Can you ask that again?

Brett Knoblauch – Berenberg Capital Markets

Yes. I'm sorry.

Mark Marron, CEO & President

I'm sorry.

Brett Knoblauch – Berenberg Capital Markets

I guess I was asking if the SLAIT acquisition played a part in the gross profit declining year-over-year. Was that was solely due to tough comps and product mix, plus the competitively priced project?

Mark Marron, CEO & President

Yes, it did not affect the GP. In fact it would have helped if anything right in terms of GP. So, it was more the product margins that was the big effect on our GP. And then some of the competitively priced deals, obviously affect GP more and more affect our gross margins - because you're getting the incremental GP, I guess. But that's how I look at that one.

Brett Knoblauch – Berenberg Capital Markets

And then just that big increase year-over-year in that, you know, gross to net adjustment. I guess, Is that something you see continually stepping up, or do you think 34% is kind of going to be - kind of the top and then that should help full feel some revenue growth going forward?

Mark Marron, CEO & President

Brett, here's the easiest thing. I never would've thought we'd be at 34%. So, I'm guessing probably about four years ago, we were in the 23%, 24% range I'm going on memory, but I won't be off by a lot. For the year, we were at 30.7%, so on a - just short of a $2 billion business, that's a big swing in terms of gross to net, in terms of - roughly $600 million going from gross to net.

So, do I expect that it may continue? Yes, we've seen that kind of trend up because one; we've got loyal customers that we're able to go back and continually renew their maintenance. I don't want to jinx myself by saying that, but that's part of the gross to net.

The other thing we're seeing is, our software is picking up. So, as the customers are looking for new buying models and a lot of our security vendors are software and subscriptions if you will, that are recognized on a net basis. I would expect it to potentially trend up for a little while. But really this is one of those things I think we got to, as we continue to transform with the market we see where it takes us.

Brett Knoblauch – Berenberg Capital Markets

And then just one more. Is my thinking correct that - if you have a higher gross to net adjustment soon that kind of help benefit the gross profit. This is recognized in that basis. So, if you had a nice or a big increase in that adjustment that you have benefit gross profit.

Mark Marron, CEO & President

No gross margin, not gross profit if you will. So, wouldn't - it would help your gross margins, where they would be higher. The things that will affect your gross profit, Brett, effectively, if we were to build up our services, which are stronger gross margins than our product sales. And then if we didn't have the tough compare or the hit we took this quarter with the product margins.

And if I could just for everybody on the call to is, when I looked at the quarter, I wouldn't say it was a strong quarter as traditionally from an ePlus perspective. But I never look at a quarter as a trend and there's a lot of positives that have been happening both in the quarter as well as what we see in the future.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over Mark Marron for any closing remarks.

Mark Marron, CEO & President

All right. Thanks Daniel. Hey everyone, just want to thank you for taking the time to listen to us on the call. We appreciate you listening in and we'll speak to you soon. Take care.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a wonderful day.