GENERAL
Our company was founded in 1990 and is a Delaware corporation.
e
Plus
inc. is sometimes referred to in this Annual Report on Form 10-K as “we,” “our,” “us,” “ourselves,” or “
e
Plus.”
Our operations are conducted through two business segments. Our technology segment sells IT hardware products, third-party software and maintenance contracts,
our own and third-party advanced professional and managed services, and our proprietary software. Our financing segment operations primarily consist of the financing of IT equipment, software and related services. Both segments sell to commercial
entities, state and local governments, government contractors, and educational institutions. See
Note 16
, “Segment Reporting” in the consolidated financial statements included elsewhere in this report.
e
Plus inc. does not engage in any business other than serving as the
parent holding company for the following operating companies:
Technology
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e
Plus Technology, inc.;
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e
Plus Technology Services, inc.;
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e
Plus Cloud Services, inc.;
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SLAIT Consulting, LLC; and
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Financing
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e
Plus Government, inc.;
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e
Plus Iceland, inc.; and
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We began using the name
e
Plus inc. in 1999 after changing our name
from MLC Holdings, Inc.
e
Plus Technology, inc. is the primary entity that conducts our technology sales and services business.
OUR BUSINESS
We are a leading solutions provider that delivers actionable outcomes for organizations by using 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
e
Plus to craft optimized solutions that take advantage of the cost, scale and efficiency of private, public and hybrid cloud in an evolving market. We also provide consulting,
professional, managed, IT staff augmentation, and complete lifecycle management services including flexible financing and solutions in the areas of security, cloud, networking, data center, collaboration and emerging technologies. We have been in
the business of selling, leasing, financing, and managing IT and other assets for more than 29 years.
Our primary focus is to deliver integrated solutions that address our customers’ business needs, leveraging the appropriate technologies, both on-premise and
in the cloud. Our approach is to lead with advisory consulting to understand our customers’ needs, design, deploy and manage solutions aligned to their objectives. Underpinning the broader areas of Cloud, Security, Networking, Data Center and
Collaboration are specific skills in orchestration and automation, application modernization, DevOps, 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, Dell EMC, F5 Networks, Gigamon, HPE, Juniper Networks, Lenovo, Microsoft, NetApp, Nutanix,
NVIDIA, Oracle, Palo Alto Networks, Pure Storage, Rubrik, Splunk, and VMware, among many others. 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 on 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
e
Plus 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, and our proprietary supply chain software, is unique in the industry. This broad portfolio enables us to deliver a unique customer experience that spans the continuum from fast delivery of competitively priced products,
services, subsequent management and upkeep, through to end-of-life disposal services. This approach permits
e
Plus to deploy ever-more-sophisticated solutions
enabling our customers’ business outcomes.
Our go-to-market strategy focuses primarily on diverse end-markets for middle market to large enterprises. For the year ended March 31, 2019, the percentage
of revenue by customer end market within our technology segment includes technology industry 22%, state and local government, and educational institutions 17%, healthcare 15%, financial services 15%, and telecommunications, media and entertainment
13%.
For the year ended March 31, 2019, there were no customers where sales exceeded 10% of net sales.
Sales to Apple Inc. represented 12% and 13% of our net sales for the
years ended March 31, 2018, and 2017, respectively.
Most of our sales were generated within the United States (“US”); however, we support our customers nationally and internationally
including physical locations in the United Kingdom (“UK”), and India, which were established by acquisitions in December 2015 and May 2017, respectively.
Our technology segment accounted for 97% of our net sales, and 71% of our operating
income, while our financing segment accounted for 3% of our net sales, and 29% of our operating income for the year ended March 31, 2019.
OUR INDUSTRY BACKGROUND AND MARKET OPPORTUNITY
We participate in the large and growing US IT market, which, according to Gartner, Inc. is estimated to have generated sales of over $1.16 trillion in 2018
and is expected to grow by 3.2% in calendar year 2019 and at an annual rate of approximately 3.7% for 2018 through 2022
1
.
We have identified and focused on several specific trends that we believe will create higher growth in the broader US IT market:
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Multi-Cloud Strategy.
Over the past several years, cloud
architectures and cloud-enabled frameworks, whether public, private, or hybrid, have become the core foundation of modern IT. Our strategy is to assist our customers in assessing, defining and deploying private and hybrid clouds that
align with their business needs. This strategy leverages our strength in deploying private clouds, while also incorporating elements of the public cloud. By assessing their applications, workloads, business requirements, etc., we deploy
solutions that leverage the best of all technology platforms and consumption models. For example, we may build a private cloud solution to host mission critical applications, while utilizing a public cloud solution for development,
collaboration, or disaster recovery. As the market matures, we will continue to build and acquire skills that align with agile development (DevOps), application refactoring, and analytics. Our cloud strategy is tightly aligned with all
our key strategic initiatives, including security, and digital infrastructure.
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Increasing sophistication and incidences of IT security breaches and
cyber-attacks.
Over the last decade, cyber-attacks have become more sophisticated, numerous, and pervasive. Organizations are finding it increasingly difficult to
effectively safeguard their information assets from a constant stream of advanced threats. Cyber-threats have shifted from uncoordinated individual efforts to highly coordinated and well-funded attacks by criminal organizations and
nation-state actors. For most organizations, it is no longer a matter of if a cyber-attack will occur; the question is when and what impact it will have on the organization. We believe our customers are focused on all aspects of cyber
security, including information and physical security, intellectual property, and compliance requirements related to industry and government regulations. To meet current and future security threats, enterprises must implement security
controls and technology solutions that leverage integrated products and services to help monitor, mitigate, and remediate security threats and attacks. Sales of security products and services were 19.5%, 18.6% and 16.1%, respectively,
of our total adjusted gross billings the years ended March 31, 2019, 2018, and 2017.
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Disruptive technologies are creating complexity and challenges for
customers and vendors.
The rapid evolution of disruptive technologies, and the speed by which they impact organizations’ IT platforms, has made it difficult for customers to effectively design, procure, implement and manage
their own IT systems. Moreover, increased budget pressures, fewer internal resources, a fragmented vendor landscape and fast time-to-value expectations make it challenging for customers to design, implement and manage secure, efficient
and cost-effective IT environments. Customers are increasingly turning to IT solutions providers such as
e
Plus to implement complex IT offerings,
including software defined infrastructure, cloud computing, converged and hyper-converged infrastructures, big data analytics, and flash storage.
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Customer IT decision-making is shifting from IT departments to
line-of- business personnel.
As IT consumption shifts from legacy, on-premise infrastructure to agile “on-demand” and “as-a-service” solutions, customer procurement decisions are shifting from traditional IT personnel to
lines-of-business personnel, which is changing the customer engagement model and types of consultative services required to fulfill customer needs. In addition, many of the services create recurring revenue streams paid over time,
rather than upfront revenue.
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Lack of sufficient internal IT resources at mid-sized and large
enterprises, and scarcity of IT personnel in certain high-demand disciplines
.
We believe that IT departments at mid-sized and large
enterprises are facing pressure to deliver emerging technologies and business outcomes but lack the properly trained staff and the ability to hire personnel with high in-demand disciplines such as security and data analytics. At the
same time the prevalence of security threats; increased use of cloud computing, software-defined networking, new architectures, and rapid software development frameworks; the proliferation of mobile devices and bring-your-own-device
(BYOD) policies; and complexity of multi-vendor solutions, have made it difficult for IT departments to implement high-quality IT solutions.
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1
Gartner, “Gartner Market
Databook, 1Q19 Update,” Spending on IT by Technology Segment and Country, 2016-2022, April 10, 2019 (US).
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Reduction in the number of IT solutions providers
.
We believe that customers are seeking to reduce the number of solutions providers they do business with to improve supply chain and internal
efficiencies, enhance accountability, improve supplier management practices, and reduce costs. As a result, customers are required to select IT solutions providers that can deliver complex multi-vendor IT solutions.
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Increasing need for third-party services.
We believe that
customers are relying on third-party service providers, such as
e
Plus, to manage significant aspects of their IT environment, from design,
implementation, pre- and post-sales support, to maintenance, engineering, cloud management, security operations, and other services.
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COMPETITION
The market for IT solutions is highly competitive, subject to macro-economic cycles and the entry of new competitors. Additionally, the consolidation of
existing market participants can create significantly larger competitors and is also affected by disruptive technologies and other market activities of industry participants. We expect to continue to compete in all areas of our business against
local, regional, national, and international firms, including vendors, international, national, and regional resellers and service providers. Some of our competitors are direct marketers with little value add and sell products as commodities, which
can place downward pressure on product pricing. In addition, many IT vendors may sell or lease directly to our customers, and our continued ability to compete effectively may be affected by the policies of such vendors. We face indirect competition
from potential customers’ internal development efforts and must overcome potential customers’ reluctance to move away from legacy systems, processes, and solution providers. As IT consumption shifts from IT personnel and legacy infrastructure to
line-of-business based outcomes using off-premise, on-demand, and cloud solutions, the legacy resale model is shifting from an upfront sale to a recurring revenue model.
The leasing and financing markets are also competitive and subject to changing economic conditions and market activities of leading industry participants. We
expect to continue to compete against local, regional, national, and international firms, including banks, specialty finance companies, private-equity asset managers, vendors’ captive finance companies, and third-party leasing companies. Banks and
other large financial services companies sell directly to business customers, particularly larger enterprise customers, and may provide other financial or ancillary services that we do not provide. Vendor captive leasing companies may use internal
transfer pricing to effectively lower lease rates and/or bundle equipment sales and leasing to provide highly competitive packages to customers. Third-party leasing companies may have deep customer relationships with contracts in place that are
difficult to displace; however, these competitors typically do not provide the breadth of product, service, and software offerings that we provide to our customers.
In all our markets, some of our competitors have longer operating histories and greater financial, technical, marketing, and other resources than we do. In
addition, some of these competitors may be able to respond more quickly to new or changing opportunities, technologies, and customer requirements. Many current and potential competitors also have greater name recognition and engage in more
extensive promotional marketing and advertising activities, offer more attractive terms to customers, and adopt more aggressive pricing policies than we do.
OUR SOLUTIONS
Technology Segment
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IT Sales:
Our offerings consist of hardware, perpetual and subscription software,
maintenance, software assurance, and internally-provided and outsourced services. We believe that our customers view technology purchases as integrated solutions, rather than discrete product and service categories, and the majority of
our sales are derived from integrated solutions involving our customers’ data center, network, security, and collaboration infrastructure. We hold various technical and sales-related certifications from leading manufacturers and
software publishers, which authorizes us to market their products and enable us to provide advanced professional services. We actively engage with emerging vendors to offer their technologies to our customers. Our flexible platform and
customizable catalogs facilitate the addition of new vendors’ products with minimal incremental effort.
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Advanced Professional and Managed Services:
We provide a range of advanced
professional and managed services to help our customers improve productivity, profitability, and revenue growth while reducing operating costs. Our solutions and services include the following:
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ePlus managed services
offer a flexible subscription model to
monitor, manage, and maximize business critical technologies—including cloud, security, data center, mobility, and collaboration;
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Professional services
focus on cloud infrastructure, unified
communications, collaboration, networking, storage, hyper-converged infrastructure, and virtual desktop infrastructure, supported by security and managed services solutions;
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Security solutions
help safeguard our customers’ business and
information assets through the appropriate application of governance, technology and supporting services:
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Governance, Risk, and Compliance (GRC) services help ensure customers are meeting governance and compliance
requirements by leveraging regulatory frameworks, industry best practices, and supporting controls - thereby allowing customers to effectively identify, assess, and mitigate risk.
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Managed Security Services help customers strengthen their information security profile with industry-leading tools, technology and expertise - often at a fraction of the
cost of in-house security resources. Services include Security Operations Center (SOC), Managed Detection and Response (MDR), and Incident Response (IR).
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Staff augmentation
services provide customers with flexible
headcount options while allowing them to access talent, fill specific technology skill gaps, or provide short-term or long-term IT professional help, which also includes services, such as Virtual Chief Information Officer (vCIO) and
Virtual Chief Information Security Officer (vCISO), used to help complement existing personnel and build three-to-five-year IT roadmaps;
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Server and desktop
support provide outsourcing services to
respond to our customers’ business demands while minimizing overhead; and
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Project management services
enhance productivity and
collaboration management and enable successful implementations and adoption of solutions for our customers.
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Financing Segment
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Leasing and Financing:
We specialize in financing arrangements, including direct
financing, sales-type, and operating leases; loans, and consumption-based financing arrangements; and underwriting and management of IT equipment and assets. Our financing operations include sales, pricing, credit, contracts,
accounting, risk management, and asset management.
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We primarily finance IT equipment, communication-related equipment, and medical equipment. We may also finance industrial machinery and equipment, office
furniture and general office equipment, transportation equipment, and other general business equipment. We offer our solutions both directly and through vendors.
We offer enhanced financing solutions, and our business process services approach automates a significant portion of the IT procurement process and reduces
our customers’ cost of doing business. The solution incorporates value-added services at every step in the process, including:
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Front-end processing, such as
e
Procurement, order aggregation, order automation,
vendor performance measurement, ordering, reconciliation, and payment;
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Lifecycle and asset ownership services, including asset management, change management, and property tax filing; and
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End-of-life services such as equipment audit, removal, and disposal.
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OUR COMPETITIVE STRENGTHS
Large Addressable Market with Substantial Growth Opportunities Driven by Increasing IT Complexity
We participate in the large and growing IT market with specific focus on the data center, network, cloud, security, virtualization, and mobility segments of
the industry, facilitated by our professional and managed service solutions. We believe we are well-positioned in the complex high-growth IT solutions segment and can achieve outsized growth relative to the overall IT market.
Our products and services target large enterprise companies, the roughly 35,000
2
middle market companies with revenues between $50 million and $1 billion, the over 89,000
3
state and local governmental organizations, larger school districts, and the
over 4,000
4
higher educational institutions in the US, and those same markets in the UK. We believe IT organizations within these companies and organizations are
facing pressure to deliver higher service levels with fewer resources, increasing their reliance on third-parties who can provide complex, multi-vendor technology solutions, such as our company.
Broad and Diverse Customer Base across a Wide Range of End Markets
We have a broad and diverse customer base of over 3,400 customers across a wide range of end-markets, including education, financial services, healthcare,
media and entertainment, state and local government, technology, and telecommunications.
Differentiated Business Model Serving Entire IT Lifecycle – Procurement, Solutions, Services, Software, Financing
We believe we are a trusted IT advisor, delivering differentiated products and services to enable our customers to meet increasingly complex IT requirements.
We are able to provide complete, turn-key solutions aligned to the entire IT lifecycle – procurement, products, services, software, and financing. We provide upfront assessments, design and configuration capabilities, installation and
implementation, and ongoing services to support our customers’ solutions.
Deep Expertise in Advanced Technology to Address Cloud, Security, Digital Infrastructure and other Emerging IT Trends
We believe our customers choose us for their complex IT infrastructure needs based on our track record of delivering best-of-breed solutions, value-added
services, and close relationships with both established and emerging vendors. We focus on obtaining and maintaining top-level engineering certifications and professional services expertise in advanced technologies of strategic vendors and possess
over 1,700 certifications that are leveraged to help our customers achieve positive business outcomes
Strategic Ability to Design and Integrate Cloud Solutions Across Multiple Vendors
We believe our expertise across both Data Center and Cloud architectures allows us to provide differentiated offerings in assisting our customers with their
journey to the cloud. Combined with our established practices in Networking and Security, we are uniquely poised to help customers adopt a multi-cloud strategy utilizing our cloud cost management framework to help overcome the inherent challenges.
We leverage our strategic partnerships with leading vendors such as Amazon Web Services, Cisco Systems, Dell EMC, Hewlett Packard Enterprise, Microsoft Azure, NetApp, and VMware in conjunction with our professional, managed and lifecycle services
to help our customers achieve their desired business outcomes.
2
World
Economic Forum, “Fueling the US Economy’s Middle Market Growth Engine”, Andrew S. Weinberg, April 12, 2018
3
United
States Census Bureau, Newsroom Archive, August 30, 2012
4
Statista.com
“Number of Higher Education Institutions in the US form 1980 to 2016”
Proven Track Record of Successfully Integrating Acquisitions and Accelerating Growth
We view acquisitions as an important factor in our strategic growth plan. Since 1997, we have successfully integrated 27 acquisitions. Most recently, we have
been active in tuck-in acquisitions to broaden our product offerings, sector reach, and geographic footprint, with recent acquisitions including:
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SLAIT Consulting, LLC (“SLAIT”) acquired in January 2019 is an IT consulting and
solutions provider with a focus on security advisory and managed services, managed help desk, specialized IT, staffing augmentation, and data center solutions. The acquisition solidifies
e
Plus’ footprint in the Mid-Atlantic and extends
e
Plus’ security consulting and
managed services capabilities. SLAIT brings
e
Plus additional consultative services in the area of GRC (governance, risk management, and compliance), customized help desk and managed services solutions, as well as a number of relationships with
fast-growing emerging vendors and related sales and engineering capabilities.
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Integrated Data Storage, LLC (“IDS”) acquired in September 2017, is an advanced data center solution
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provider focused on cloud enablement and managed services, including its proprietary IDS Cloud. The acquisition expands
e
Plus’ footprint in the Midwest and enhances its sales and engineering capabilities in cloud services, disaster recovery and backup as a service, storage, data
center, and professional services.
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OneCloud Consulting, Inc. (“OneCloud”) acquired in May 2017, is a deployment, cloud consulting, and training company. The acquisition, based in Milpitas, California, with
operations in the US and India, provides us with additional ability to address customers’ needs in cloud-based solutions and infrastructure, including DevOps, OpenStack, and other emerging technologies, to our broad customer base. The
company empowers organizations to design, deploy, and scale cutting-edge technologies to support the next phase of their business. Specialized training courses are tailored to drive end-user technology adoption and workshop offerings
range from Automation to Cloud, Infrastructure, DevOps, and OpenStack as well as emerging technologies in the Artificial Intelligence and Machine Learning space.
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Consolidated Communications IT services and integration business (“Consolidated IT Services”), acquired in December 2016, provides data center, unified communications,
networking, and security solutions, as well as expanded our sales presence in the upper Midwest.
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IGX Acquisition Global, LLC, and IGX Support, LLC, including IGX Acquisition’s wholly-owned subsidiary, IGXGlobal UK Limited (collectively, “IGX”) – acquired in December
2015. Expanded our sales presence in New York and New England, as well as an operating branch in London that serves the UK and global customers.
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We generally integrate acquired firms into the
e
Plus platform
immediately, which allows us to maintain customers and vendor relationships, retain key employees from acquired firms, and accelerate growth.
We continue to review new acquisition opportunities to expand our global footprint and expand our offerings.
Financial Performance Characterized by Growth and Profitability
We have focused on achieving top-line revenue growth while maintaining industry-leading gross margins – with a compound annual growth rate of 4.6% on net
sales and 7.8% for consolidated gross profit, respectively, from April 1, 2014 to March 31, 2019.
Through our organic expansion and acquisitions, we have increased our employee base by 72.7% from April 1, 2014 to March 31, 2019. The increase in our
employee base has largely been in customer facing roles, which increased by 92.4% over the same period, as we continue to build our sales and services team while leveraging our operational infrastructure.
GROWTH STRATEGY
Our goal is to continue to grow as a leading provider of technology solutions. The key elements of our strategy include the following:
Be Our Customers’ Partner of Choice for Comprehensive IT and Lifecycle Solutions, Including Consulting, Managed and
Professional Services, and Financing
We seek to become the primary provider of IT solutions for each of our customers, whether on-premise, cloud, or managed services-based. We strive to provide
excellent customer service, pricing, availability, and advanced professional and managed services in an efficient manner. We believe the increasing complexity of the IT ecosystem and the emergence of new technologies and vendors are factors that
will lead to a growing demand from existing customers. We have a large number of experienced pre-sales engineers engage with customers about the most advanced technologies. Our account executives are trained on our broad solutions capabilities with
access to many, category focused subject matter experts, which allow them to sell in a consultative business outcome-based manner that increases the likelihood of cross-selling our solutions; our account executives are supported by experienced and
professional inside sales representatives. We believe that our bundled offerings are an important differentiating factor from our competitors.
We focus on gaining top-level engineering certifications and professional services expertise in advanced technologies of strategic vendors. This expertise
helps our customers develop their cloud capabilities including private, public, and hybrid infrastructures. We are providing virtual desktop infrastructure, unified communications, collaboration, networking, security, storage, big-data, mobility,
converged and hyper-converged infrastructures, and managed services offerings, all of which remain in high demand. We believe our ability to deliver advanced professional services provides benefits in two ways. First, we gain recognition and
mindshare of our strategic vendor partners and become the “go-to” partner in selected regional markets as well as the national market. This significantly increases direct and referral sales opportunities for our products and services and allows us
to offer competitive pricing levels. Second, within our existing and potential customer base, our advanced professional services are a key differentiator against competitors who cannot provide services or advanced services for these key
technologies or across multiple vendor product lines.
During the last fiscal year, we enhanced our Managed Services across several fronts. We upgraded our service management and configuration management database
systems to increase the level of automation, transparency, and integration with customers and launched a completely new interface for our Executive Dashboard to provide enhanced instrumentation, user experience, and lifecycle data related to
managed assets. We expanded our portfolio to include monitoring for Cisco Application Centric Infrastructure components as well as monitoring, management, and Enhanced Maintenance Support (EMS) for Check Point firewalls. We also bolstered our
NetApp EMS/SSC support through the acquisition of SLAIT, as well as fully integrated our Cloud Managed Backup, Cloud Disaster Recovery, and Cloud Hosted Infrastructure offerings as a result of our IDS acquisition.
Build Our Geographic Footprint
We intend to increase our direct sales and go-to-market capabilities in each of our geographic areas. We actively seek to acquire new account relationships
through face-to-face field sales, electronic commerce, leveraging our partnerships with vendors, and targeted demand-generation activities to increase awareness of our solutions. We also seek to broaden our customer base, expand our geographic
reach, and improve our technology and professional services delivery capabilities. During the last fiscal year, we expanded our sales and delivery capabilities across multiple international markets as we see more demand for solutions within this
market.
Recruit, Retain, and Develop Employees
Based on our prior experience, capital structure, and business systems and processes, we believe we are well positioned to take advantage of hiring
experienced sales people and engineers, make strategic acquisitions that expand our customer facing talent, broaden our customer base, expand our geographic reach, scale our existing operating structure, and/or enhance our product and service
offerings. Part of our growth strategy is to hire purposefully and enhance our technical and skill base through strategic acquisitions. During the year ended March 31, 2019, as part of our expansion strategy, our customer facing sales and
professional services team grew from 965 to 1,217.
Improve Operational Efficiencies
We continue to invest in our internal technology infrastructure and software platforms to optimize our operations and engage in process re-engineering efforts
to become more streamlined and cost effective.
RESEARCH AND DEVELOPMENT
We incur software development costs associated with maintaining, enhancing, or upgrading our proprietary software, which may be performed by internal IT
development resources or by an offshore software-development company that we use to supplement our internal development team or various US based consultants.
SALES AND MARKETING
We focus our sales and marketing efforts on becoming the primary provider of IT solutions for each of our customers. We seek to acquire new account
relationships through face-to-face field sales, leveraging our partnerships with manufacturers and targeted direct marketing to increase awareness of our solutions. We target commercial enterprises, primarily middle market companies with annual
revenues between $20 million and $2.5 billion and large companies, as well as larger state and local governments and educational institutions. We currently have over 3,400 customers. We undertake direct marketing and leverage digital marketing and
social media campaigns to target certain markets in conjunction with our primary vendor partners, who may provide financial reimbursement, outsourced services, and personnel to assist us in these efforts.
Our sales representatives are compensated by a combination of salary and commission, with commission becoming the primary component of compensation as the
sales representatives gain experience. To date, we acquired a majority of our customers through the efforts of our direct sales force and acquisitions. We market to different areas within a customer’s organization, including business units as well
as the IT department, or finance department, depending on the solutions.
As of March 31, 2019, our sales force consisted of 547 sales, marketing and sales support personnel organized regionally in 41 offices and customer locations
throughout the US, UK, India, and Singapore.
INTELLECTUAL PROPERTY RIGHTS
Our success depends in part upon proprietary business methodologies and technologies that we have licensed and modified. We own certain software programs or
have entered into software licensing agreements to provide services to our customers. We rely on a combination of patents, copyrights, trademarks, service marks, trade secret protection, confidentiality and nondisclosure agreements, and licensing
arrangements to establish and protect our intellectual property rights. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection.
For example, we have a number of patents in the US and certain patent rights in other jurisdictions, including some European forums, Japan, and Canada. We
cannot provide assurance that any patents, as issued, will prevent the development of competitive products or that our patents will not be successfully challenged by others or invalidated through the administrative process or litigation.
Our trademarks include
e
+®,
e
Plus®, Procure+®, Manage+®, Docpak®, Viewmark®, OneSource®, and Where Technology Means More® in the US, and IGXGlobal® in Great Britain and the European Union (“EU”). We intend to use
and protect these and our other marks, as we deem necessary. We believe our trademarks have significant value and are an important factor in the marketing of our products. In addition to our trademarks, we have service marks and over 20 registered
copyrights and additional common-law trademarks and copyrights.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is difficult and can be expensive, and while we are unable to determine the extent to which piracy of our software products exists, software piracy could be expected to be a
persistent problem. Our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop similar technology, duplicate our products or design around our proprietary intellectual property.
FINANCIAL AND RISK MANAGEMENT ACTIVITIES
Inventory Management
: We have drop-shipment arrangements with many
of our vendors and distributors, which permit us to offer products to our customers without having to take physical delivery of the equipment. Arrow Enterprises, Ingram Micro, Tech Data, and Synnex Corporation are our largest distributors. Using
the distribution systems available, we frequently sell products that are shipped from the vendors or distributors directly to our customers’ location, which allows us to keep our inventory of any product and shipping expenses to a minimum. For the
year ended March 31, 2019, our four largest distributors accounted for over 30% of our purchases related to our technology segment net sales.
Risk Management and Process Controls
: We use and maintain
conservative underwriting policies and disciplined credit approval processes in both our technology and financing segments. We have an executive management review process and other internal controls in place to evaluate transactions’ potential
risk.
In our technology segment, we manage our risk by using conservative credit quality analysis and periodic monitoring of customer financial results or
third-party risk evaluation tools; monitoring customer accounts receivable balances and payment history; proactively pursuing delinquent accounts; ensuring we have appropriate contractual terms and conditions; perfecting security interests when
practicable; requiring prepayment or deposits if indicated; performing fraud checks for new accounts; and evaluating general economic as well as industry specific trends. Our systems automatically decrease trade credit lines based on assigned risk
ratings.
In our financing segment, we manage our risk in assets we finance by assigning the contractual payments due under the financing arrangement to third-parties.
We also use agency purchase orders to procure equipment for lease to our customers and otherwise take measures to minimize our inventory of financed assets. When our technology segment is the supplier of the assets being financed, we retain certain
procurement risks. Our financing arrangements with our customers are generally fixed-rate.
Credit Risk Loss Experience
: During the fiscal year ended March 31,
2019, we increased our reserves for credit losses by $335 thousand, and incurred actual credit losses of $385 thousand. During the fiscal year ended March 31, 2018, we increased our reserves for credit losses by $462 thousand, and incurred actual
credit losses of $3,190 thousand. During the fiscal year ended March 31, 2017, we increased our reserves for credit losses by $277 thousand, and incurred actual credit losses of $78 thousand.
BACKLOG
We rely on our vendors or distributors to fulfill a large majority of our shipments to our customers. As of March 31, 2019, we recorded customer commitments
to purchase products or services that remain open until either executed or canceled (“open orders”) of $161.4 million and deferred revenue of $61.0 million. As of March 31, 2018, we had open orders of $148.2 million and deferred revenues of $48.6
million. We expect that most of open orders as of March 31, 2019, will be recognized within ninety days of that date. We also expect that 77% of the deferred revenues as of March 31, 2019, will be recognized within the next twelve months.
EMPLOYEES
As of March 31, 2019, we employed 1,537 employees who operated through 41 offices, home offices, and customer sites. No employees are represented by a labor
union, and we believe that we have good relations with our employees. The functional areas of our employees are as follows:
|
|
March 31,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Sales and Marketing
|
|
|
547
|
|
|
|
499
|
|
|
|
48
|
|
Professional Services
|
|
|
670
|
|
|
|
466
|
|
|
|
204
|
|
Administration
|
|
|
230
|
|
|
|
207
|
|
|
|
23
|
|
Software Development and Internal IT
|
|
|
83
|
|
|
|
80
|
|
|
|
3
|
|
Management
|
|
|
7
|
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
|
1,537
|
|
|
|
1,260
|
|
|
|
277
|
|
US SECURITIES AND EXCHANGE COMMISSION REPORTS
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, filed with or furnished to
the US SEC, are available free of charge through our Internet website,
www.eplus.com
, as soon as reasonably practical after we have electronically filed such material
with, or furnished it to, the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at
www.sec.gov
. The contents on or accessible through these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual
references only.
The following table sets forth the name, age and position of each person who was an executive officer of
e
Plus on March 31, 2019. There are no family relationships between any directors or executive officers of
e
Plus.
Name
|
Age
|
Position
|
|
|
|
Mark P. Marron
|
57
|
Chief Executive Officer, President, and Director
|
|
|
|
Elaine D. Marion
|
51
|
Chief Financial Officer
|
|
|
|
Darren Raiguel
|
48
|
Chief Operating Officer and ePlus Technology, inc. President
|
The business experience of each executive officer of
e
Plus is
described below:
Mark Marron – Chief Executive Officer, President and Director
Mark P. Marron
became the Chief Executive Officer
and President of
e
Plus inc. on August 1, 2016. He began his career at
e
Plus
in 2005 as Senior Vice President of Sales and became Chief Operating Officer in 2010. A 30-year industry veteran, he was formerly with NetIQ where he held the position of Senior Vice President of Worldwide Sales and Services. Prior to joining
NetIQ, Mr. Marron served as General Manager of Worldwide Channel Sales for Computer Associates International Inc., a provider of software and services that enables organizations to manage their IT environments. Mr. Marron has extensive experience
throughout North America, Europe, the Middle East, and Africa and holds a Bachelor of Science degree in Computer Science from Montclair State University.
Elaine Marion – Chief Financial Officer
Elaine D. Marion
joined us in 1998. Ms. Marion
became our Chief Financial Officer on September 1, 2008. From 2004 to 2008, Ms. Marion served as our Vice President of Accounting. Prior to that, she was the Controller of
e
Plus Technology, inc., a subsidiary of
e
Plus, from 1998 to 2004. Ms. Marion currently serves on the Advisory Board of the School of
Business at the University of Mary Washington and as a member of the George Mason University School of Business Dean’s Advisory Council. Ms. Marion is a graduate of George Mason University, where she earned a Bachelor of Science degree in Business
Administration with a concentration in Accounting.
Darren Raiguel – Chief Operating Officer and ePlus Technology inc. President
Darren S, Raiguel
joined the company in 1997
as an account
executive and has held numerous management positions in the organization for well over a decade.
Mr.
Raiguel became
our Executive Vice President of Technology Sales, and in May 2018 was promoted to Chief Operating Officer of
e
Plus inc. and
President of
e
Plus Technology, inc. Mr. Raiguel received a Bachelor of Business Administration degree from Temple University, with dual majors in Marketing
and Finance. He has participated in numerous industry organizations, councils, and advisory boards throughout his career.
General economic weakness may harm our operating results and financial condition.
Our results of operations are largely dependent upon the state of the economy. Global economic weakness and uncertainty may result in decreased sales, gross
margin, earnings and/or growth rates from our US based customers and from customers outside the US For example, there continues to be substantial uncertainty regarding the economic impact of the Referendum on the UK’s Membership of the EU (referred
to as “Brexit”). Potential adverse consequences of Brexit, such as global market uncertainty, volatility in currency exchange rates, greater restrictions on imports and exports between the UK and EU countries, increased tariffs and increased
regulatory complexities could have a negative impact on our business, financial condition, and results of operations. In addition, material changes in trade agreements between the US and other countries may, for example, negatively affect our
ability to purchase product, and import or export product, increases product pricing and negatively impact availability of product. Adverse economic conditions may decrease our customers’ demand for our products and services or impair the ability
of our customers to pay for products and services they have purchased. As a result, our sales could decrease, and reserves for our credit losses and write-offs of receivables may increase.
If we lost one or more of our large volume customers, our earnings may be affected.
The contracts for the provision of products and services from us to our customers are generally non-exclusive agreements without volume purchase commitments
and are terminable by either party upon 30 days’ notice. The loss of one or more of our largest customers, the failure of such customers to pay amounts due to us, or a material reduction in the amount of purchases made by such customers could have
a material adverse effect on our business, financial position, results of operations and cash flows.
Changes in the IT industry, customers’ usage or procurement of IT, and/or rapid changes in product standards may result
in reduced demand for the IT hardware and software solutions and services we sell.
Our results of operations are influenced by a variety of factors, including the condition of the IT industry, shifts in demand for, or availability of, IT
hardware, software, peripherals and services, and industry introductions of new products, upgrades, methods of distribution, and the nature of how IT is consumed and procured. The IT industry is characterized by rapid technological change and the
frequent introduction of new products, product enhancements and new distribution methods or channels, each of which can decrease demand for current products or render them obsolete. In addition, the proliferation of cloud technology, IaaS, SaaS,
platform as a service (“PaaS”), software defined networking, or other emerging technologies may reduce the demand for products and services we sell to our customers. Cloud offerings may influence our customers to move workloads to cloud providers,
which may reduce the procurement of products and services from us. Changes in the IT industry may also affect the demand for our advanced professional and managed services. We have invested a significant amount of capital in our strategy to provide
certain products and services, and this strategy may adversely impact our financial position due to competition or changes in the industry or improper focus or selection of the products and services we decide to offer. If we fail to react in a
timely manner to such changes, our results of operations may be adversely affected. Our sales can be dependent on demand for specific product categories, and any change in demand for or supply of such products could have a material adverse effect
on our results of operations.
We depend on continued innovations in hardware, software and services offerings by our vendors, as well as the
competitiveness of their offerings and our ability to partner with new and emerging technology providers.
The technology industry is characterized by rapid innovation and the frequent introduction of new and enhanced hardware, software and services offerings, such
as cloud-based solutions, including IaaS, SaaS and PaaS. We depend on innovations in hardware, software and services offerings by our vendors, as well as the acceptance of those innovations by our customers for the offerings we sell. A decrease in
the rate of innovation by our vendors, or the lack of acceptance of innovations by our customers, or a shift by customers to technology platforms that we do not sell could have an adverse effect on our business, results of operations or cash flows.
In addition, if we are unable to keep up with changes in technology and new hardware, software and services offerings––for example by not providing the
appropriate training to our account managers, sales technology specialists and engineers to enable them to effectively sell and deliver such new offerings to customers––our business, results of operations or cash flows could be adversely affected.
We also depend upon our vendors for the development and marketing of hardware, software and services to compete effectively with hardware, software and
services of vendors whose products and services we do not currently offer or are not authorized to offer in one or more customer channels. In addition, our success depends on our ability to develop relationships with and sell hardware, software and
services and emerging vendors, as well as vendors that we have not historically represented in the marketplace. To the extent that a vendor’s offering that is highly in demand is not available to us for resale in one or more customer channels, and
there is not a competitive offering from another vendor that we are authorized to sell in such customer channels, or we are unable to develop relationships with new technology providers or companies that we have not historically represented, or we
partner with a vendor that is not in demand or demand significantly decreases, our business, results of operations, or cash flows could be adversely impacted.
We may fail to innovate or create new solutions which align with changing market and customer demand.
As a provider of a comprehensive set of solutions, which involves the offering of bundled solutions consisting of direct IT sales, advanced professional and
managed services, our propriety software, and financing, we expect to encounter some of the challenges, risks, difficulties, and uncertainties frequently encountered by companies providing bundled solutions in rapidly evolving markets. Some of
these challenges include our ability to increase the total number of users of our services, adapt to meet changes in our markets and competitive developments, or continue to update our technology to enhance the features and functionality of our
suite of products. Our personnel must continually stay current with vendor and marketplace technology advancements, create solutions which may integrate evolving vendor products and services as well as services and solutions we provide, to meet
changing marketplace and customer demand. Further, we may provide customized solutions and services that are solely reliant on our own marketing, design and fulfillment services, and we may lack the skills or personnel to execute. Our failure to
innovate and provide bespoke value to our customers may erode our competitive position, market share and lead to reduce revenue and financial performance.
In the software market, a number of companies market business-to-business electronic commerce solutions similar to ours, and competitors are adapting their
product offerings to a SaaS platform. We may not be able to compete successfully against current or future competitors, and competitive pressures faced by us may harm our business, operating results, or financial condition. We also face indirect
competition from customers’ potential internal development efforts and have to overcome customers’ potential reluctance to move away from legacy systems and processes.
In all of our markets, some of our competitors have longer operating histories and greater financial, technical, marketing, and other resources than we do. In
addition, some of these competitors may be able to respond more quickly to new or changing opportunities, technologies, and customer requirements. Many current competitors may have, and potential competitors may have, greater name recognition,
engage in more extensive promotional marketing and advertising activities, offer more attractive terms to customers, and adopt more aggressive pricing and credit policies than we do. We may not be successful in achieving revenue growth and may
incur additional costs associated with our software products, which may have a material adverse effect on our future operating results as a whole.
We rely on a small number of key vendors, and do not
have long-
term
supply or guaranteed price agreements or assurance of stock availability with our vendors.
A substantial portion of our revenue within our technology segment
depends on a small
number of key vendors. Products manufactured by Cisco Systems represented approximately 42%, 42%, and 47% of our technology segment net sales for the years ended March 31, 2019, 2018, and 2017, respectively. Products manufactured by NetApp, Hewlett
Packard, Juniper Networks, Dell/EMC, and Arista Networks, represented approximately 20% - 22% of technology segment net sales for the last three years.
Our industry frequently experiences periods of product shortages from our vendors or our
vendor’s distributors as a result of our vendors’ difficulties in projecting demand for certain products we sell; additional trade law provisions or regulations; additional duties, tariffs or other charges on imports or exports; natural disasters
affecting our suppliers’ facilities; and significant labor disputes. As we do not stock inventory that is not related to an order we have received from our customer, we depend upon the supply of products available from our vendors to fulfill
orders from our customers on a timely basis.
The loss of, or change in business relationship with, any of these or any other key vendor partners, the diminished availability of their products, or backlogs for their products leading to
manufacturer allocation could reduce the supply and increase the cost of products we sell and negatively impact our competitive position.
The loss of a key vendor or changes in its policies could adversely impact our financial
results.
Violations
of a contract that results in either the termination of our ability to sell the product or a decrease in our certification level with the vendor could
adversely impact our financial results. In addition, a reduction in the trade credit lines or the favorable terms granted to us by our vendors and financial partners could increase our need for and cost of working capital and have a material
adverse effect on our business, results of operations and financial condition.
We may experience a reduction in incentives offered to us and earned by us from our vendors that would affect our
earnings.
We receive payments and credits from vendors, including consideration pursuant to volume
incentive programs, shared marketing expense programs, and early pay discounts. These programs are usually of finite terms and may not be renewed or may be changed in a way that adversely affects us. Vendor funding is used to offset inventory
costs, costs of goods sold, marketing costs and other operating expenses. Certain of these funds are based on our volume of purchases, growth rate of purchases, and marketing programs. If we do not grow our
sales
over prior periods, or if we do not comply with the terms of these programs, or do not sell certain products that earn the incentive, there could be a material negative effect on the amount of incentives
offered or paid to us by vendors. We may not continue to receive such incentives or may not be able to collect outstanding amounts relating to these incentives in a timely manner, or at all. Any sizeable reduction in, the discontinuance of, a
significant delay in receiving, or the inability to collect such incentives, particularly related to incentive programs with our largest vendors could have a material adverse effect on our business, results of operations and financial condition.
If we are unable to react timely to any fundamental changes in the programs of vendors, including the elimination of funding for some of the activities for which we have been compensated in the past, such changes could have a material adverse
effect on our business, results of operations and financial condition.
We depend on third-party companies to perform certain of our obligations to our customers, which if not performed
adequately could cause significant disruption to our business.
We rely on arrangements with third-parties to perform certain professional services, managed services, warranties, configuration services, and other services
for our customers. If these third-parties do not perform these in accordance with the terms of our agreement and of a professional standard customary for the services, or if they cause disruption of or security weaknesses in our customers’
businesses, results to our organization could include legal claims and associated costs, monetary damages paid to our customers, and an adverse effect on our customer relationships, our brand, and our reputation, and our results of operations or
cash flows could be affected.
We rely on independent shipping companies to deliver products from us and our vendors to our customers. The failure or inability of these shipping companies
to deliver products, or the unavailability of their shipping services, even temporarily, could have an adverse effect on our business. We may also be adversely affected by an increase in freight surcharges that may result from economic,
supply-chain, geopolitical, or other disruptions. We may incorrectly import or export products when shipping to and from different countries. Violation of trade laws may disrupt our international operations negatively or impair our reputation or we
may incur monetary damage. Violation of trade laws may also result in audits, fines, penalties, litigation, or administrative enforcement actions with associated costs.
Breaches of data security and the failure to protect our information technology systems from cybersecurity threats
could adversely impact our business.
Our business involves the storage and transmission of proprietary information and sensitive or confidential data, including personal information of our
employees, customers and others. In addition, we operate data centers for our customers that host their technology infrastructure and may store and transmit both business-critical data and confidential information. In connection with our services
business, some of our employees also have access to our customers’ confidential data and other information. We have privacy and data security policies in place that are designed to prevent security breaches; however, as newer technologies evolve,
and the portfolio of the service providers with which we share confidential information with grows, we could be exposed to increased risk of breaches in security and other illegal or fraudulent acts, including cyberattacks. The evolving nature of
such threats, in light of new and sophisticated methods used by criminals and cyberterrorists, including computer viruses, malware, phishing, misrepresentation, social engineering and forgery, are making it increasingly challenging to anticipate
and adequately mitigate these risks.
We may not be able to hire and/or retain personnel that we need.
To increase market awareness and sales of our offerings, we may need to expand our marketing efforts and sales operations in the future. Our products and
services require a sophisticated sales effort and significant technical engineering talent. For example, our sales and engineering candidates must have highly technical hardware and software knowledge to create a customized solution for our
customers’ business processes. Competition for qualified sales, marketing and engineering personnel fluctuates depending on market conditions. The US is currently in a low unemployment environment and we may not be able to hire or retain sufficient
personnel to maintain and grow our business. In addition, changes to immigration laws may impact our ability to hire or retain talent. Frequently, our competitors require their employees to agree to non-compete and non-solicitation agreements as
part of their employment. This makes it more difficult for us to hire and increases our costs by reviewing and managing non-compete restrictions. Additionally, in some cases our relationship with a customer may be impacted by turnover in our sales
or engineering team.
We face substantial competition from other companies.
In our technology segment, we compete in all areas of our business against local, regional, national, and international firms, including other direct
marketers; national and regional resellers; online marketplace competitors; and regional, national, and international service providers. In addition, we face competition from vendors, which may choose to market their products directly to end-users,
rather than through channel partners such as our company, and this could adversely affect our future sales. Many competitors compete based principally on price and may have lower costs or accept lower selling prices than we do and, therefore, our
gross margins may not be maintainable. Online market place competitors are continually improving their pricing and offerings to customers as well as ease of use of their online marketplaces. Our competitors may offer better or different products
and services than we offer. In addition, we do not have guaranteed purchasing volume commitments from our customers and, therefore, our sales volume may be volatile.
In our financing segment, we face competition from many sources including much larger companies with greater financial resources. Our competition may
originate from vendors of the products we finance or financial partners who choose to market directly to customers through the vendors’ captive leasing organization or large or regional financial institutions such as banks with substantially lower
cost of funds. Our competition may lower lease rates to increase market share.
If we fail to perform sufficient due diligence prior to completing an acquisition, or entering into a strategic
alliance, or fail to integrate a completed acquisition our earnings may be affected.
Our ability to successfully integrate the operations we acquire, reduce costs, or leverage these operations to generate revenue and earnings growth, could
significantly impact future revenue and earnings. Integrating acquired operations is a significant challenge, may divert management’s attention from other business concerns, and there is no assurance that we will be able to manage the integrations
successfully. Failure to successfully integrate acquired operations may adversely affect our cost structure thereby reducing our gross margins and return on investment. In addition, we may fail to perform adequate due diligence and acquire entities
with unknown liabilities, fraud, cultural or business environment issues, or that may not have adequate internal controls as may be required by law.
If we acquire a company that does not fit culturally, strategically, or in some other fashion,
the acquisition may not produce the expected results or may negatively affect our reputation, which may negatively affect
our business, results of operations, or cash flows.
In addition, our financial results could be adversely affected by financial adjustments required by generally accepted accounting principles in the US
(“GAAP”) in connection with these types of transactions where significant goodwill or intangible assets are recorded. To the extent the value of goodwill or identifiable intangible assets with indefinite lives becomes impaired; we may be required
to incur material charges relating to the impairment of those assets.
Our earnings may fluctuate, which could adversely affect the price of our common stock.
Our earnings are susceptible to fluctuations for a number of reasons, including, but not
limited to, the risk factors discussed
herein
. In the event our sales or net earnings are less than the level expected by the market in general, such shortfall could have an
immediate and significant adverse impact on the market price of our common stock.
Rising interest rates or the loss of key lenders may affect our future profitability and our ability to monetize our
financing receivables and investments in operating leases.
We finance transactions with our customers utilizing fix-rate borrowing. If we fund such transactions at inception with a third-party lender, we are able to
lock an interest rate spread on the transaction between the customer rate and third-party rate. However, we may delay funding the transaction, and if interest rates increase in the interim, the interest rate spread will decrease, which will
adversely impact our profitability, or we may not choose to fund the transaction due to higher interest rates, thus inhibiting our ability to monetize our portfolio to generate cash.
We rely on lenders to fund financing transactions we originate with our customers. Loss of any lender or group of lenders may significantly impact our ability
to originate financing transactions, which may negatively impact our financial condition. In addition, our lenders may no longer be willing to provide funding under our current terms and conditions and may demand new terms and conditions that
negatively impact our ability to consummate a financing transaction with our customers. We are also subject to changes, if any, in our lenders’ willingness to provide financing for different, particularly lower, credit quality lessees.
We may not have designed or maintained our IT systems to support our business.
We depend heavily upon the accuracy and reliability of our information, telecommunication,
cybersecurity and other systems including the operation of redundant systems if there are failures in our primary systems, which are used for customer management, sales, distribution, marketing, purchasing, inventory management, order processing
and fulfillment, customer service and general accounting functions. We must continually maintain, secure and improve our systems. The protections we have in place address a variety of threats to our information technology systems, both internal
and external, including human error. Inadequate security practices or design of our IT systems, or IT systems from third-parties which we utilize, or third-party service providers’ failure to provide adequate services could result in the
disclosure of sensitive or confidential information or personal information or cause other business interruptions that could damage our reputation and disrupt our business.
Inadequate
design or interruption of our information systems, Internet availability, telecommunications systems or power failures could have a material adverse effect on our business, our reputation, financial condition, cash flows, or results of
operations.
Our managed services business requires us to monitor our customers’ devices on their networks across varying levels of service. If we have not designed our IT
systems to provide this service accurately or if there is a security breach in our IT system or the customers’ systems, we may be liable for claims.
We rely on the competency of our internal IT personnel. Our failure to hire, develop, retain, and supervise competent IT personnel to secure our data, design
redundant systems, or design and maintain our technology systems including our data and voice networks, and applications, could significantly interrupt our business causing a negative impact on our results.
We may not adequately protect ourselves through our contract vehicles, or our insurance policies may not be adequate to
address potential losses or claims.
Our contracts may not protect us against the risks inherent in our business including, but not
limited to, warranties, limitations of liability, indemnification obligations, human resources and subcontractor-related claims, patent and product liability,
regulatory and compliance obligations, data security and privacy,
and financing activities. Also, we face pressure from our customers for competitive pricing and contract terms. Despite the non-recourse nature of the loans financing certain of our
activities, non-recourse lenders may file suit if the underlying transaction turns out poorly for the lenders. We are subject to such claims and the cost of defending such claims due to the nature of our business.
We also are subject to audits by various vendor partners and customers, including government agencies, relating to purchases and sales under various
contracts. In addition, we are subject to indemnification claims under various contracts.
We depend on having creditworthy customers to avoid an adverse impact on our operating results and financial condition.
Our financing and technology segments require sufficient amounts of debt or equity capital to fund our equipment purchases. If the credit quality of our
customer base materially decreases, or if we experience a material increase in our credit losses, we may find it difficult to continue to obtain the required capital for our business, and our operating results and financial condition may be harmed.
In addition to the impact on our ability to attract capital, a material increase in our delinquency and default experience would itself have a material adverse effect on our business, operating results, and financial condition.
As of March 31, 2019, and 2018, we had reserves for credit losses of $2.6 million and $2.7 million, respectively.
We may be liable for misuse of our customers’ or employees’ information.
Third-parties, such as hackers, could circumvent or sabotage the security practices and
products used in our product and service offerings, and/or the security practices or products used in our internal IT systems, which could result in disclosure of sensitive or personal information, unauthorized procurement, or other business
interruptions that could damage our reputation and disrupt our business.
Attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats.
If third-parties or our employees are able to maliciously penetrate our network security or
otherwise misappropriate our customers’ information or employees’ personal information, or other information for which our customers may be responsible and for which we agree to be responsible in connection with service contracts into which we
may enter, or if we give third-parties or our employees improper access to certain information, we could be subject to liability. This liability could include claims for unauthorized access to devices on our network; unauthorized access to our
customers’ networks, applications, data, devices, or software; unauthorized purchases with credit card information; and identity theft or other similar fraud-related claims. This liability could also include claims for other misuses of or
inappropriate access to personal information. Other liability could include claims alleging misrepresentation of our privacy and data security practices. Any such liability for misappropriation of this information could decrease our
profitability. In addition, federal and state agencies have been investigating various companies regarding whether they misused or inadequately secured information. We could incur additional expenses when new laws or regulations regarding the use
of information are enacted, or if governmental agencies require us to substantially modify our privacy or security practices.
We could fail to comply with international and domestic data privacy laws, the violation of which may result in
audits, fines, penalties, litigation, or administrative enforcement actions with associated costs.
Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the
security practices we use to protect sensitive customer transaction information and employee information. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations.
Further, third-parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords, or other information or otherwise compromise the security of our internal networks and/or our
customers’ information. Since techniques used to obtain unauthorized access change frequently and the size and severity of security breaches are increasing, we may be unable to implement adequate preventative measures or timely identify or stop
security breaches while they are occurring.
We may be required to expend significant capital and other resources to protect against security breaches or to remediate the subsequent risks and issues
caused by such breaches. Our security measures are designed to protect against security breaches, but our failure to prevent such security breaches could cause us to incur significant expense to investigate and respond to a security breach and
correct any problems caused by any breach, subject us to liability, damage our reputation, and diminish the value of our brand. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would
otherwise protect us from any such liabilities or damages with respect to any particular claim. We also cannot be sure that our existing insurance coverage for errors and omissions or security breaches will continue to be available on acceptable
terms or in sufficient amounts to cover one or more large claims, or that our insurers will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or
changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on our business, financial condition, and results of operations.
Failure to comply with our public-sector contracts or applicable laws and regulations could result in, among other
things, termination, fines or other liabilities, and changes in procurement regulations could adversely impact our business.
Revenues in our public sector are derived from sales to state and local government and educational institution (“SLED”) customers, through various contracts
and open market sales of products and services. Sales to SLED customers are highly regulated. Noncompliance with contract provisions, government procurement regulations, or other applicable laws or regulations could result in civil, criminal, and
administrative liability, including substantial monetary fines or damages, termination of SLED sector customer contracts, and suspension, debarment, or ineligibility from doing business with the government and other customers in the SLED sector. In
addition, contracts in the SLED sector are generally terminable at any time for convenience of the contracting agency or upon default and are subject to audits. In addition, most contracts require successfully bidding and award of the contract.
These bid processes can be complex and require extensive review of terms and conditions and data compilation. Multiple bidders may win a product category, which creates aggressive competition even after contract award. The effect of any of these
possible actions could adversely affect our business, results of operations or cash flows. In addition, the adoption of new or modified procurement regulations and other requirements may increase our compliance costs and reduce our gross margins,
which could have a negative effect on our business, results of operations, or cash flows.
Failure to comply with new laws or changes to existing laws may adversely impact our business.
Our operations are subject to numerous US and foreign laws and regulations in a number of areas including, but not limited to, areas of labor and employment,
immigration, advertising, e-commerce, tax, import and export requirements, anti-corruption, data privacy requirements, anti-competition, and environmental, health, and safety. Compliance with these laws, regulations, and similar requirements may be
onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business, and the risk of noncompliance. We have implemented policies and procedures designed to help comply
with applicable laws and regulations, but there can be no certainty that against employees, contractors, or agents will fully comply with laws and regulations or our policies and procedures.
Loss of services by any of our executive officers or senior management and/or failure to successfully implement a
succession plan could adversely affect our business.
The loss of the services by our executive officers or senior management and/or failure to successfully implement a succession plan could disrupt management of
our business and impair the execution of our business strategies. We believe that our success depends in part upon our ability to retain the services of our executive officers and senior management and successfully implement a succession plan. Our
executive officers are at the forefront in determining our strategic direction and focus. The loss of our executive officers’ and senior management’s services without replacement by qualified successors could adversely affect our ability to manage
effectively our overall operations and successfully execute current or future business strategies, and could cause other instability within our workforce
We rely on inventory and accounts receivable financing arrangements for working capital and our accounts payable
processing.
The loss of the technology segment’s credit facility could have a material adverse effect on our future results as we rely on this facility and its components
for daily working capital and the operational function of our accounts payable process. Our credit agreement contains various covenants that must be met each quarter and either party may terminate the agreement for any reason with a 90-days’
notice. There can be no assurance that we will continue to meet those covenants and failure to do so may limit availability of, or cause us to lose, such financing. There can be no assurance that such financing will continue to be available to us
in the future on acceptable terms.
Changes in accounting standards, or the misapplication of current accounting standards, may adversely affect our future
financial results.
We prepare our financial statements in conformity with accounting principles generally accepted
in the US These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the Public Company Accounting Oversight Board, the SEC, the American Institute of Certified Public Accountants (“AICPA”) and various
other bodies formed to interpret and create appropriate accounting policies. Future periodic assessments required by current or new accounting standards may result in noncash
charges
and/or changes in presentation or disclosure. In addition, any change in accounting standards may influence our customers’ decision to purchase from us or finance transactions with us, which could have a significant adverse effect on
our financial position or results of operations.
We are required to determine if we are the principal or agent in all transactions with our
customers. The voluminous number of products and services we sell, and the manner in which they are bundled, are technologically complex. Mischaracterization of these products and services could result in misapplication of revenue recognition
polices. We use estimates where necessary, such
as the fair value of assets acquired, and liabilities assumed in a business combination, the analysis for goodwill impairment, allowance
for doubtful accounts and the cost to perform professional and managed services, which require judgment and are based on best available information. If we are unable to accurately estimate the cost of these services or the time-line
for completion of contracts, the profitability of our contracts may be materially and adversely affected.
We may not be able to realize our entire investment in the equipment we lease.
The realization of the residual value of the equipment we lease, predominantly at the end of the term of a lease, as well as during the life of the lease, is
an important element in our financing segment. At the inception of certain leases, we record a residual value for the leased equipment based on our estimate of the value of the equipment at the expected disposition date.
A decrease in the market value of leased equipment at a rate greater than the rate we projected, whether due to rapid technological or economic obsolescence,
excessive or unusual wear and tear on the equipment, or other factors, would adversely affect the recoverability of the estimated residual values of such equipment. Further, certain equipment residual values are dependent on the vendor’s
warranties, reputation, rules regarding relicensing of software to operate the equipment, and other factors, including market liquidity. In addition, we may not realize the full market value of equipment if we are required to sell it to meet
liquidity needs or for other reasons outside of the ordinary course of business. Consequently, there can be no assurance that we will realize our estimated residual values for equipment.
The degree of residual realization risk varies by transaction type. Direct financing leases bear less risk because contractual payments typically cover 90% or
more of the equipment’s lease cost at inception. Operating leases have a higher degree of risk because a smaller percentage of the equipment’s value is covered by contractual cash flows at lease inception.
Our results of operations are subject to fluctuations in foreign currency.
We have several foreign subsidiaries and conduct business in various countries and currencies. As result of these foreign operations, we have exposure to
fluctuations in foreign currency rates resulting primarily from the translation exposure associated with the preparation of our consolidated financial statements. While our consolidated financial statements are reported in US dollars, the financial
statements of our subsidiaries outside the US are prepared using the local currency as the functional currency and translated into US dollars. As a result, fluctuations in the exchange rate of the US dollar relative to the functional currencies of
our subsidiaries could cause fluctuations in our results of operations. Our operations in our foreign countries is insignificant. We also have foreign currency exposure to the extent net sales and purchases are not denominated in a subsidiary’s
functional currency, which could have an adverse effect on our business, results of operations, or cash flows.
If we publish inaccurate catalog content data, our business could suffer.
Any defects or errors in our electronic catalog content data could harm our customers or deter businesses from participating in our offerings, damage our
business reputation, harm our ability to attract new customers, and potentially expose us to liability. In addition, from time to time vendors who provide us electronic catalog data could submit to us inaccurate pricing or other catalog data. Even
though such inaccuracies are not caused by us and are outside of our control, such inaccuracies could deter current and potential customers from using our products or result in inaccurate pricing to our customers.
We may be required to take impairment charges for goodwill or other intangible assets related to acquisitions.
We have acquired certain portions of our business and assets through acquisitions. Further, as part of our long-term business strategy, we may continue to
pursue acquisitions of other companies or assets. In connection with prior acquisitions, we have accounted for the portion of the purchase price paid in excess of the book value of the assets acquired as goodwill or intangible assets, and we may be
required to account for similar premiums paid on future acquisitions in the same manner.
Under the applicable accounting principles, goodwill is not amortized and is carried on our books at its original value, subject to annual review and
evaluation for impairment, whereas intangible assets are amortized over the life of the asset. Changes in the business itself, the economic environment (including business valuation levels and trends), or the legislative or regulatory environment
may trigger a review and evaluation of our goodwill and intangible assets for potential impairment outside of the normal review periods. These changes may adversely affect either the fair value of the business or our individual reporting units and
we may be required to take an impairment charge.
If market and economic conditions deteriorate, this could increase the likelihood that we will need to record impairment charges to the extent the carrying
value of our goodwill exceeds the fair value of our overall business. Such impairment charges could materially adversely affect our net earnings during the period in which the charge is taken. As of March 31, 2019, we had goodwill and other
intangible assets of $110.8 million and $38.9 million, respectively.
We face risks of claims from third-parties for intellectual property infringement, including counterfeit products, that
could harm our business.
We may be subject to claims that our products and services, or products that we resell, infringe on the intellectual property rights of third-parties and/or
are counterfeit products. The vendor of certain products or services we resell may not provide us with indemnification for infringement or indemnification; however, our customers may seek indemnification from us. We could incur substantial costs in
defending infringement claims against ourselves and our customers. In the event such claims, we and our customers may be required to obtain one or more licenses from third-parties. We may not be able to obtain such licenses from third-parties at a
reasonable cost or at all. Defense of any lawsuit or failure to obtain any such required license could significantly increase our expenses and/or adversely affect our ability to offer one or more of our services.
If our proprietary software products contain defects, our business could suffer.
Products as complex as those used to provide our electronic commerce solutions or cloud
automation solutions, such as scripts, often contain unknown and undetected errors, performance problems, or use open source code. We may have serious defects immediately following introduction of new products or enhancements to existing
products. Undetected errors or performance problems may be discovered in the future and certain errors we consider to be minor may be serious to our customers. Our software products, or automation solutions, may be circumvented or sabotaged by
third-parties such as hackers, which could result in the disclosure of sensitive information or personal information, unauthorized procurement, or cause other business interruptions that could damage our reputation and disrupt our business.
Attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats
. In addition, our customers may
experience a loss in connectivity to our proprietary software solutions because of a power loss at our data center, Internet interruption, or defects in our software. This could result in lost revenues, delays in customer acceptance, security
breaches, and unforeseen liabilities that would be detrimental to our reputation and to our business.
We may be unable to protect our intellectual property and costs to protect our intellectual property may affect our
earnings.
The success of our business strategy depends, in part, upon proprietary technology and other intellectual property rights. To date, we have relied primarily
on a combination of copyright, trademark, patent, and trade secret laws, and contractual provisions with our customers, subcontractors and employees to protect our proprietary technology. It may be possible for unauthorized third-parties to copy
certain portions of our products or reverse engineer or obtain and use information that we regard as proprietary. Some of our agreements with our customers and technology licensors contain residual clauses regarding confidentiality and the rights
of third-parties to obtain the source code for our products. These provisions may limit our ability to protect our intellectual property rights in the future that could seriously harm our business and operating results. Our means of protecting our
intellectual property rights may not be adequate.
The legal and associated costs to protect our intellectual property may significantly increase our expenses and have a material adverse effect on our
operating results. We may deem it necessary to protect our intellectual property rights and significant expenses could be incurred with no certainty of the results of these potential actions. Costs relative to lawsuits are usually expensed in the
periods incurred and there is no certainty in recouping any of the amounts expended regardless of the outcome of any action.
If securities analysts do not publish research or reports about our company, or if they issue unfavorable commentary
about us or our industry or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock depends in part on the research and reports that third-party securities analysts publish about us and our industry.
One or more analysts could downgrade our common stock, or issue other negative commentary about us or our industry. If one or more of the analysts that publish research about us cease coverage, we could lose visibility in the market or such
discontinuance may be viewed negatively by the market. As a result of one or more of these factors, the trading price of our common stock could decline.
Future offerings of debt or equity securities, which would rank senior to our common stock, may adversely affect the
market price of our common stock.
If, in the future, we decide to issue debt or equity securities that rank senior to our common stock, it is likely that such securities will be governed by an
indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of
our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future
offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future offerings, if any. Thus, holders of our common stock will bear the risk of our future
offerings reducing the market price of our common stock and diluting the value of their stock holdings in our common stock.