Executive Summary / Key Takeaways

• Strategic Metamorphosis Creates Clarity: ePlus's June 2025 divestiture of its domestic financing business transforms it from a hybrid IT solutions provider into a pure-play technology services company, unlocking capital for high-growth AI, security, and cloud investments while eliminating the margin drag and cyclicality of leasing operations.

• AI-Driven Operating Leverage Is Real: Q2 FY26's 62% adjusted EBITDA growth on 23.4% net sales growth demonstrates the company's ability to generate disproportionate profit expansion, as automation and services mix shift drive 250 basis points of operating margin improvement to 8%, validating the strategy of aligning headcount toward high-growth focus areas.

• The Gross-to-Net Revenue Shift Is a Double-Edged Sword: While the industry-wide transition to ratable subscription models compresses reported net sales by approximately $60 million quarterly (940 basis points impact in prior year), it simultaneously expands gross margins by 160 basis points in the product segment and 270 basis points consolidated, creating a more profitable but optically slower-growing business.

• Bailiwick Acquisition: Growth Now, Margin Pressure Later: The August 2024 acquisition of Bailiwick Services contributed 10% of Q2 FY26's growth but diluted professional services margins by 310 basis points to 38.2% due to its higher third-party delivery model, creating a near-term trade-off between scale and profitability that management must optimize.

• Valuation Hinges on Execution, Not Market Conditions: Trading at $89.79 with an EV/EBITDA of 10.41x and P/E of 18.40x, ePlus trades at a discount to larger peers like CDW (12.68x EV/EBITDA) despite superior growth, but the stock's risk/reward depends entirely on whether management can sustain mid-teens revenue growth while expanding services margins and capitalizing on its $400 million+ cash war chest for accretive acquisitions.

Setting the Scene: From Financing to AI-First Services

ePlus inc., founded in 1990 as a Delaware corporation, spent three decades building a hybrid model that combined IT product resale with financing services. This structure provided a unique value proposition: customers could acquire technology through capital leases, reducing upfront expenditure while ePlus captured financing spreads. However, this model also masked the company's true strategic value. The June 30, 2025 sale of its domestic financing business to Marlin Leasing Corporation (dba PEAC Solutions) represents more than a divestiture—it is a strategic unmasking that positions ePlus as a pure-play technology solutions provider.

The company now operates through three reportable segments: Product, Professional Services, and Managed Services. The shift eliminates the capital intensity and credit risk of leasing, freeing management to focus exclusively on high-margin, recurring services. The financing segment generated $21.9 million in net sales in Q2 FY25, but its removal allows ePlus to redeploy capital toward AI infrastructure, security platforms, and cloud automation. Investors should view this not as shrinking the business but as sharpening its edge.

ePlus sits in the $1.6 trillion global IT services market, competing against giants like CDW Corporation (CDW) (17% U.S. market share), Insight Enterprises (NSIT) (6-8% share), and PC Connection (CNXN) (3% share). With approximately 1.75% market share, ePlus is a niche player. However, its Q2 FY26 net sales growth of 23.4% dramatically outpaces CDW's 4% growth, Insight's -4% decline, and PC Connection's -2.2% contraction. This divergence signals that ePlus's strategy—focusing on AI, security, and cloud—is capturing disproportionate value in a market growing at only 2-4% annually.

The company's core customer base spans medium and large enterprises, state and local government, and educational institutions (SLED) in the U.S., U.K., EU, India, and Singapore. This diversification provides multiple growth vectors while mitigating concentration risk. Notably, Q2 FY26 saw strong performance across all customer sizes, with particular strength in mid-market and enterprise segments, while SLED faced budget constraints. This bifurcation suggests ePlus can pivot toward commercial opportunities when public sector spending tightens, a flexibility that pure-play government contractors lack.

Technology, Products, and Strategic Differentiation

ePlus's competitive moat rests on its ability to deliver end-to-end AI infrastructure and security solutions, not just resell products. The company achieved NVIDIA (NVDA) DGX Ready SuperPOD and DGX Ready managed service provider specializations, making it the only North American partner with both designations. This demonstrates engineering expertise for enterprise-grade AI deployments, enabling ePlus to capture high-value design and implementation work that commodity resellers cannot.

The AI Ignite and Secure GenAI programs represent more than marketing initiatives—they are consultative frameworks that help customers navigate AI maturity gaps. In an ePlus survey, 76% of IT leaders reported their organizations have yet to reach AI maturity, citing skills gaps, security concerns, and costs as top challenges. This creates a services opportunity: ePlus can monetize assessments, proof-of-concepts, and managed AI workloads. The September 2025 acquisition of Realwave, a cloud-based AI-powered automated data analysis platform, further enhances this capability, allowing ePlus to offer AI-enabled deep learning services that competitors lack.

Security has become a standout practice, with gross billings up 52% year-over-year in Q2 FY26, representing 24% of trailing 12-month billings versus 21% last year. Security spending is non-discretionary and grows with AI adoption—every AI deployment requires governance, risk management, and data readiness. ePlus's ability to bundle security with AI and cloud services increases customer stickiness and average contract value.

The company's professional services span digital signage, EV charging solutions, loss prevention, and store openings, primarily through the Bailiwick acquisition. While these offerings diversify revenue, Bailiwick's model uses a higher proportion of third-party delivery, resulting in lower gross margins (38.2% in Q2 FY26 versus 41.3% for legacy ePlus). This creates a strategic tension: Bailiwick provides scale and entry into retail, finance, and hospitality verticals, but dilutes overall services margins. Management must prove it can integrate Bailiwick's operations and gradually improve its margin profile.

Financial Performance & Segment Dynamics: Evidence of Strategy Working

ePlus's Q2 FY26 results provide compelling evidence that the pure-play pivot is working. Consolidated net sales grew 23.4% to $608.8 million, while adjusted EBITDA surged 62%, growing at more than twice the rate of sales. This operating leverage reflects strategic alignment of headcount toward AI, data center, cloud, security, and networking, while automating internal processes. The 250 basis point improvement in operating margin to 8% shows the company is scaling efficiently, a key concern for investors given the margin dilution from Bailiwick.

The product segment delivered 24.5% net sales growth to $485.0 million, with gross margin expanding 160 basis points to 24.5%. This expansion stems from a favorable mix shift toward third-party maintenance and subscription software recognized on a net basis. While the gross-to-net adjustment reduces reported revenue, it increases profitability per dollar of billings. Vendor incentives as a percentage of sales also increased by 20 basis points, further boosting margins. This dynamic is crucial for investors to understand: ePlus is sacrificing top-line optics for bottom-line quality.

Professional services grew 23.3% to $76.3 million, but gross margin contracted 310 basis points to 38.2%. Management explicitly attributes this to Bailiwick's lower-margin profile. For the six-month period, the segment grew 49.3% but margin declined 270 basis points to 38.7%. This trade-off is acceptable if Bailiwick's revenue scale accelerates overall growth and provides cross-selling opportunities, but sustained margin pressure would erode the segment's contribution to operating leverage.

Managed services increased 15.9% to $47.4 million, with gross margin stable at 29.4% (down just 10 basis points). This segment provides the most predictable revenue, with typical contract terms of three to five years. The 11.3% growth for the six-month period and modest margin decline of 50 basis points to 29.9% reflects an expanded service mix and a decline in service desk revenue. For investors, managed services represent the annuity-like foundation that supports ePlus's valuation multiple.

The balance sheet is a strategic asset. With over $400 million in cash and a debt-to-equity ratio of just 0.09, ePlus has the firepower to fund organic investments and acquisitions while returning capital through dividends and buybacks. During Q2 FY26, the company repurchased 60,000 shares for $4.4 million under a new 1.5 million share authorization. The quarterly dividend of $0.25 per share (1.11% yield) signals confidence in sustained cash generation. This financial flexibility is critical for a growth company competing against better-capitalized rivals.

Outlook, Management Guidance, and Execution Risk

Management raised fiscal 2026 guidance after Q2 FY26, now expecting net sales growth in the mid-teens from FY25's $2.01 billion base, with gross profit also growing mid-teens and adjusted EBITDA increasing at approximately twice the rate of net sales. This guidance assumes continued operating leverage from strategic headcount alignment and automation. The fact that most Q2 growth was organic (90%) with acquisitions contributing only 10% suggests the core business is accelerating, not just benefiting from deal timing.

Mark Marron's commentary reveals management's mindset: "We're a growth company... we have a lot of flexibility in terms of how we can go grab market share, expand our footprint, our customer base." Despite strong operating leverage, management will continue investing in organic hires and acquisitions rather than maximizing near-term margins. Investors should expect SG&A expenses to rise as the company builds out its AI and services capabilities, creating a potential tension between growth investment and margin expansion.

The guidance also reflects awareness of macro uncertainty. Marron noted execution "especially in a kind of uncertain economic market with what's going on with the government shutdown, tariffs and inflation up or down." This prudence is warranted: Q4 FY25 net sales declined 10.2% due to economic uncertainty and tough comparisons from prior-year supply chain easing. The company is guiding for mid-teens growth despite these headwinds, suggesting confidence in its AI and security demand drivers.

A key execution swing factor is the timing of AI revenue conversion. Management has stated that AI spending "right now is a headwind" as customers evaluate options, but they expect upside over time. This creates a timing risk: if AI adoption cycles elongate beyond expectations, ePlus's growth could decelerate. Conversely, if AI deployments accelerate, the company is uniquely positioned with its NVIDIA specializations and AI Ignite programs to capture disproportionate value.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is customer concentration and hardware demand cyclicality. While ePlus serves diverse verticals, large enterprise customers drive significant revenue. In Q2 FY25, management noted "softer than expected hardware product sales" and "lower demand from certain enterprise customers as they continue to digest purchases from last year's flush." This digestion cycle could persist, delaying new technology rollouts and compressing product segment growth. If enterprise customers pause spending for multiple quarters, ePlus's mid-teens growth guidance becomes vulnerable.

The gross-to-net revenue shift, while margin-accretive, creates optical growth headwinds and comparability issues. The 940 basis point adjustment in Q2 FY25 reduced net sales by approximately $60 million. If this trend accelerates as OEMs push more subscription models, reported revenue growth could lag actual billings growth, potentially disappointing investors focused on top-line metrics. Management must consistently educate the market on this dynamic to avoid valuation compression.

Bailiwick's margin dilution presents a strategic risk. If the company cannot improve Bailiwick's 38% gross margin toward its legacy 41%+ level, overall services profitability will remain pressured. This could limit operating leverage despite strong revenue growth. The risk is amplified if Bailiwick's third-party delivery model introduces quality control issues or customer satisfaction problems that damage ePlus's reputation.

Competitive pressure from larger players is intensifying. CDW's scale enables it to negotiate better vendor terms and offer lower prices, potentially squeezing ePlus's product margins. Insight's AI-first transformation and PC Connection's SMB focus create overlapping competitive pressure. While ePlus's financing heritage provides unique customer relationships, the loss of the financing business removes a key differentiator in capex-constrained deals. The company must now compete purely on technology and services execution.

The AI market timing risk is significant. Management's admission that AI is "a headwind" suggests customers are in evaluation mode. If AI deployments fail to materialize at scale, ePlus's investments in AI Ignite, NVIDIA specializations, and Realwave could generate lower returns than expected. Conversely, if AI adoption accelerates faster than anticipated, ePlus could face capacity constraints or execution challenges that cause it to miss demand.

Valuation Context: Positioning Relative to Growth and Risk

At $89.79 per share, ePlus trades at a market capitalization of $2.39 billion and an enterprise value of $2.09 billion (0.93x revenue). The P/E ratio of 18.40x is in line with CDW (18.49x) and below Insight (20.30x), despite ePlus's superior growth profile. The EV/EBITDA multiple of 10.41x trades at a discount to CDW's 12.68x, suggesting the market has not fully recognized ePlus's improved operating leverage.

Cash flow metrics tell a more nuanced story. The price-to-operating cash flow ratio of 25.73x and price-to-free cash flow of 27.67x reflect strong cash generation but also indicate the market is pricing in continued growth. With a return on equity of 12.97% and return on assets of 6.04%, ePlus delivers solid but not exceptional profitability. The low debt-to-equity ratio of 0.09 provides a significant valuation cushion compared to CDW's 2.40x and Insight's 1.03x, reducing financial risk.

Relative to peers, ePlus's valuation appears reasonable for its growth trajectory. CDW trades at higher multiples despite slower growth due to its scale and market dominance. Insight trades at lower EV/Revenue (0.46x) but has negative revenue growth and lower margins. PC Connection's EV/Revenue of 0.38x reflects its smaller scale and slower growth. ePlus's 0.93x revenue multiple fairly reflects its mid-teens growth potential and improving margin profile.

The key valuation driver will be management's ability to deliver on its guidance: mid-teens revenue growth with EBITDA growing at twice that rate. If ePlus can sustain this operating leverage while gradually improving services margins, multiple expansion is likely. Conversely, if growth decelerates or margin dilution from Bailiwick persists, the stock could compress toward peer averages.

Conclusion: A Transformed Company at an Inflection Point

ePlus has executed a strategic transformation that positions it as a pure-play technology solutions provider at the center of AI, security, and cloud adoption. The divestiture of its financing business provides capital clarity, while the Bailiwick and Realwave acquisitions expand its services capabilities and AI portfolio. Q2 FY26's record $1 billion in gross billings and 62% adjusted EBITDA growth demonstrate that the strategy is working, with operating leverage validating management's focus on high-growth areas.

The investment thesis hinges on two critical variables: execution of the AI opportunity and optimization of services margins. If ePlus can convert its NVIDIA specializations and AI Ignite programs into meaningful revenue as customers move from evaluation to deployment, it can sustain superior growth. Simultaneously, if management can integrate Bailiwick's operations and improve its margin profile, overall profitability will accelerate.

The stock's valuation at $89.79 does not yet reflect the company's improved growth quality and operating leverage. While risks around customer concentration, hardware cycles, and AI timing remain, ePlus's strong balance sheet, diversified customer base, and unique positioning in the AI infrastructure layer provide downside protection. For investors willing to accept execution risk, ePlus offers a compelling combination of growth, margin expansion, and capital allocation discipline that should drive long-term value creation.