PLUS Q1 Earnings Call: Services Growth Offsets Product Decline, Management Cautious on Outlook

IT solutions provider ePlus (NASDAQ:PLUS) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 10.2% year on year to $498.1 million. Its non-GAAP EPS of $1.11 per share was 28.3% above analysts’ consensus estimates.

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StockStory’s Take

ePlus' latest quarter reflected a shift in its revenue mix, as a decline in product sales was partially offset by robust growth in services. Management highlighted that demand for security, AI, and cloud offerings drove increased gross profit and margin expansion. CEO Mark Marron noted that the company’s services-led approach, supported by strategic investments and acquisitions such as Bailiwick, resulted in higher gross margins and deeper customer relationships. While product sales faced headwinds from industry-wide shifts to subscription models and lingering macroeconomic uncertainty, services revenue—including managed and professional services—continued to grow rapidly. The company’s focus on high-margin solution areas contributed to improved profitability, despite a challenging sales environment.

Looking ahead, ePlus is positioning itself for further growth by expanding its capabilities in AI, security, and cloud services. Management remains cautious, citing persistent economic uncertainty and the ongoing customer transition to subscription-based revenue models. CEO Mark Marron stated, “We are cautiously optimistic... but want to be prudent when considering the entire year and the trends we are experiencing with regard to ratable and netted down revenue.” The company expects continued strong demand for services, particularly as enterprise customers explore AI adoption through workshops and proof-of-concept offerings. However, management does not anticipate a significant acceleration in AI-driven infrastructure spending until later in the year or next year, and its forward guidance assumes some ongoing impact from economic headwinds.

Key Insights from Management’s Remarks

Management attributed the quarter's performance to the ongoing shift from product to services revenue, a more profitable business mix, and investments in high-growth technology areas. Economic uncertainty and the transition to subscription models also affected top-line results.

• Services revenue momentum: ePlus’ services revenue, including professional and managed services, continued to grow at a rapid pace, with professional services benefiting from the Bailiwick acquisition and managed services bookings remaining strong. This shift is central to the company’s strategy of deepening customer engagement and generating more predictable revenue streams.
• Product sales softness: The decline in product sales was largely attributed to industry-wide shifts toward subscription and ratable revenue models, as well as tough year-over-year comparisons given last year’s supply chain-driven product deliveries. Management noted that some customers are still digesting prior networking equipment purchases, delaying new orders.
• Security and AI demand: Security-related offerings now represent a growing share of gross billings, reflecting heightened enterprise focus on digital risk mitigation. AI-driven workshops and envisioning sessions have received positive customer feedback, positioning ePlus for future growth as enterprise adoption of AI expands.
• Margin expansion: Gross margin improved significantly due to a higher mix of services revenue and products recognized on a net basis, as well as disciplined expense management. The company’s operating margin also increased, helped by the more profitable business mix.
• Strategic investments and partnerships: ePlus has invested in AI expertise and infrastructure, including achieving NVIDIA DGX Ready SuperPOD and managed service provider specializations. These credentials support the company’s capabilities in deploying enterprise-grade AI solutions and managing complex workloads.

Drivers of Future Performance

Management expects trends like services growth and AI adoption to shape revenue and profitability, while macroeconomic uncertainty and slower product spending remain key considerations.

• Enterprise AI adoption timing: While management sees long-term potential in AI, they believe most investment is currently concentrated with hyperscaler data centers, not enterprises. Broader enterprise spending on AI infrastructure is expected to pick up later this year or next, with current demand focused on workshops and pilot programs.
• Subscription model transition: ePlus anticipates continued headwinds from the industry shift toward ratable and subscription-based revenue models, which could dampen near-term product sales but support future growth and margin expansion as services become a larger part of the business.
• Economic and customer demand uncertainty: Management remains cautious due to ongoing macroeconomic uncertainty and slower decision-making among enterprise customers, especially in networking. Guidance assumes some continued impact from these headwinds, without factoring in a full recession scenario.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) whether services revenue maintains its growth trajectory as enterprises continue to shift spending, (2) signs of recovery in networking product demand as customers complete equipment digestion, and (3) the pace at which enterprise AI adoption translates into infrastructure and consulting revenue. The company’s ability to leverage its new AI partnerships and manage economic uncertainty will also be key for future performance.

ePlus currently trades at a forward P/E ratio of 15.3×. Should you double down or take your chips? Find out in our full research report (it’s free).

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