Climb Global Solutions, Inc. (CLMB) Q3 2015 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and Welcome to the Wayside Technology Group Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Callers please note that you are limited to one question each. [Operator Instructions] As a reminder ladies and gentlemen this conference is being recorded. I would now like to introduce our host of today’s conference, Ms. Melanie Caponigro, you may begin your conference at this time.

Thank you and good morning. Welcome to Wayside Technology’s third quarter 2015 earnings call. Before turning the call over to Simon Nynens, the Company’s Chairman and CEO, I’ll dispense with the customary cautionary language and comment about the webcast for this earnings call. We released earnings for the third quarter at approximately 5:00 PM Eastern Time, Thursday, October 29, 2015. The earnings release is available at the Company’s Investor Relations Website at waysidetechnology.com. Today’s call including all questions and answers is being webcast live and a rebroadcast will be available at www.waysidetechnology.com/earnings-call. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, October 30, 2015. A detailed discussion of risks and uncertainties are discussed in our Forms 10-Q and also in greater detail in our Forms 10-K. Wayside Technology Group Inc. sees no obligation to update and does not intend to update any forward-looking statements. Now, I would like to turn the call over to Simon Nynens.

Thank you, Melanie and good morning to everybody, good results, passion and execution. We are different and we are different exceedingly well. Good results, where as our much larger peers reported anemic growth [ph] or declining sales, our revenue increased 8% to $98 million. Gross profit increased 11% to $6.9 million, an income from operations increased 20% to $2.3 million. Our next income per share on a fully diluted basis increased 14% from $0.29 of share to $0.33 of share and these are GAAP numbers. Cash and long-term receivables amounted to $25.7 million, representing 68% of equity as of the end of the quarter. Working capital amounted to $31.3 million or 82% of equity as of the end of the quarter. We started paying dividend in 2003 more than 12 years ago. We started at $0.10 per quarter and we’ve steadily increased our dividend, it now stands at $0.17 per quarter. This dividend is subject to board approval on a quarterly basis. The last increase was in the third quarter of 2013, from $0.16 to $0.17 per share. In the last five years, we’ve paid out more than $15 million. We also bought back 235,000 shares this year for a total of $3.9 million. Cash and execution we are excited about the prospect of more software publishers joining us. We continue to invest in our team in the third quarter and we can expect to continue to do so, all in order to manage the expected growth of our company. Our new sales office in Arizona is working well. And in addition on September 2014, we announced the appointment of Jacqui Nyborg as Vice President of Marketing. Mrs. Nyborg report to our Executive Vice President, Bill Botti. She joins us with 20 years of sales and channel experience. Most recently, she served as Director of Global Channel Marketing for Perfecto Mobile, a mobile application software and testing company. Prior to Perfecto Mobile, she was at Dell Quest Software, Sophos, and Aspen Technologies. We look forward to her contributions in aligning our marketing programs with business goals and building tools, at our sales people, as well as our customers’ needs. We are also in the final stages of finding a new home for our headquarters. It will not have an impact, a large impact on our financial results as we don’t have a definitive contract yet. So far, we have in principle agreed on the price for building at the previous army Fort Monmouth, a few miles away from here. $1.4 million for 53,700-square-foot building, which equates to only $26 per square foot, there are some hurdles we still have to take. Yet we are excited about the prospect of moving our headquarters to this new location few miles away from our current headquarters. We applied for and receive a tax grant the final amounts depend on several variables. To be able to own our own headquarters at this price is exciting for employees and shareholders. This move is currently planned to take place early Q4 of next year. As stated before, we do not expect an increase in cost related to this move, as compared to our current building of only 18,000 square foot. Now I would like to hand it over to Bill Botti, our Executive Vice President. Will?

Thank you, Simon. As noted in our release, we had a quarter overall with revenue up 8% and gross profit up 11% year-over-year. Our Lifeboat business saw a [ph] 11% in Q3 to $86.1 million, compared to $77.4 million in Q3 of 2014. Our TechXtend segment retracted 12% to $11.6 million, when compared to the same period last year, which was $13.1 million, due to a continued decrease in our extended payment term transactions. Gross profit for Lifeboats segment – excuse me – in the third quarter was up 16% to $5.5 million versus $4.7 million for the same period last year, due to an increase in sales volume and deeper comp penetration into its strategic accounts. The TechXtend segment had higher percentage of GP compared to last year, and declined only 3% to $1.4 million due to the sales volume but with higher margins. Gross profit margin for Q3 for Lifeboat was 6.4%, compared to 6.1% for the third quarter of 2014, which was caused by different product mix and marketing events. TechXtend profit margin for Q3 2015 was 12%, compared to 10.9%, due to the decline in extended payment terms transaction and a different product mix. Our Phoenix office expansion is complete and fully staffed to current staff plan levels, with room for expansion is needed in 2016. The addition of Brian Gilbertson in Q2, is providing a return as we made a lot of progress in expanding our product portfolio during Q3 and have already announced a major new vendor relationship with Super Micro. This agreement is with their Integrated Solutions Group and provides us access to both traditional server and storage products for the first time at Lifeboat. It also provides us with Integrated Solutions for VMware EVO:RAIL, VMware VSAN and extended store products among others. Also announced this week was a new integrated product from Lifeboat where we are using a custom supermicro configuration and integrating in our back-up vendors like Veeam into the box, adding installation services and providing our resellers an integrated appliance which we call CBUS, standing for Converged Backup Solution. There are several additional vendor announcements coming over the next few weeks, as we prepare to bring them to market in 2016. We continue to manage our expenses and build our product portfolio to help achieve our growth targets. Thank you. Simon, back to you.

Thank you, Bill. Kevin Scull, will now report on the financial numbers. Kevin?

Thank you, Simon. And good morning to our investors, and analysts, and employees. I will discuss our third quarter financial results both on a consolidated basis as well as by segment. Net sales for the third quarter of 2015 were $97.7 million. This is compared to $90.5 million in the prior year, representing an 8% increase on a consolidated basis. Sales for our Lifeboat segment were $86.1 million and represent 88% of our total revenue. Lifeboat sales reflecting an 11% increase compared to the prior year. The increase in sales in the Lifeboat segment was mainly the result of addition of several key product lines and our ongoing strategy of strengthening our account penetration. Sales for our TechXtend segment were $11.6 million compared to $13.1 million in the prior year, representing a 12% decrease. The decrease in net sales in the TechXtend segment was primarily due to a decrease in extended payments, term sales transactions, and larger sales transactions as compared to the prior year. On consolidated basis, our gross profit was $6.9 million compared to $6.2 million in the third quarter of 2014, representing an 11% increase. Our gross profit margin for the quarter was 7% compared to 6.8% in the prior year. Lifeboats’ gross profit for the quarter was $5.5 million is compared to $4.7 million in the prior year, and represents an 11% increase. This increase in gross profit was primarily due to higher sales volume in the current year. Our TechXtend segment gross profit was $1.4 million and decreased by 3% compared to the prior year. Total selling, general and administrative expenses were $4.6 million compared to $4.3 million. This increase is primarily the result of an increase in sales related expenses and employee related expenses, salaries commissions, bonus accruals and benefits in 2015 compared to 2014. A large part of this increase was due to hiring field sales team and professional services team. Our net income for the quarter was $1.6 million compared to $1.4 million in the prior year. Our earnings per share in a fully diluted basis was $0.33 per share compared to $0.29 in the prior year. Now moving onto the balance sheet. Compared to our year-end balance sheet, the following key terms at fluctuation. Cash was healthy $19.6 million at the quarter-end compared to $23.1 million at year-end. This decrease is primarily cash used for stock purchases of $3.9 million, dividend payments of $2.4 million offset in part by cash generated from operations. Accounts receivable current and long-term decreased by 8%. This decrease is primarily due to fewer extended payment term transaction in 2015, as compared to 2014 and a decrease in DSO over the year end. Accounts payable and accrued expenses decreased by 12%, due to lower sales volume, compared to the year-end and an increase in early payment discounts taken by the company in the current year. The company has no debt, we do however have $10 million revolving credit facility that can be used for working capital purposes and to finance large transactions. As of the quarter end, we had no outstanding balance under the credit loan facility. Working capital at quarter-end was $31.3 million. During the quarter, we repurchased approximately 65,000 shares of our common stock. The company has a 10-b5 plan effective until February 2016 to repurchase shares. We still have Board authorization to buyback approximately 491,000 shares. Our stockholder equity now stands at 38.1 million. At our October 27, Board of Directors meeting, the Board declared a dividend of $0.17 per share for its common stock payable November 17 to shareholders record on November 10. In conclusion, the company continues to have solid operating results of strong balance sheet and is adequately capitalized to support our continued growth. Simon I will turn it back to you.

Thank you, Kevin. Before starting the Q&A session, I would just like to say it again we remain focused on adding new publishers, providing our customers with excellent customer service and providing our ample use for the great and rewarding working environment. With a price earnings multiple of just over 14 times, our current dividend yield of about 3.8% and over $26 million or almost a fifth of our market cap – cash and long-term receivables, we are confident in the performance of our stock price. Thank you operator, we can now start the Q&A session.

Certainly [Operator Instructions] And our first question comes from Peter Locks, your line is open, Peter.

Good morning, guys, how are you doing?

Good morning, Peter.

Although, I’m not around the corner anymore, I still keep an eye on you, guys. So good quarter, so I wanted to ask you to characterize your company, would you can say yourself, a value company or a growth company?

I say, we would – we are growing to provide more value. I would not grow for growth sake, I would only grow in the areas that we are growing in such as adding field sales reps, Director of Professional Services, Jacqui Nyborg in marketing, we make those moves in order to provide value to our customers. We are not a volume player. Again, look at our peer competitors, they are all doing billions of dollars. That will be foolish trying to compete with them on volume. We are competing on value and we do so exceedingly well.

And just further question, follow-up on that. As a value company, was it – time, I mean, you expressed that the last time you raised your dividend was 2013, has it – was it on the table that perhaps it was time given the earnings momentum to increase the dividend at all?

Yes, something we discussed on a quarterly basis again with hardcore investments this year, significant investments in the growth of our company. And the significant stock buyback of 3.9 million this year. We've also been a value player as you know as a long-term investor in our company. We are a conservative company and I think we’ve done quite well over the last 12 years. Again, we paid out over $15 million in five years. We are not fly-by dividend declaring company, that declares a large dividend from one quarter to get a spike in PR. We are all long-term investors and we are conservative. And we expect to increase the dividend as we grow our company.

Just one more question. I’ll let you go. If you do go ahead with the Fort Mon [ph] is the purchase is that going to be outright cash or you going to take a mortgage back?

That is on the consideration. We do have to see while the numbers add up and what the mortgage rates are going to be et cetera.

Good luck. Thanks.

Thank you.

And our next question comes from Richard Graham [ph]. Your line is open.

Yes, so dividend related question. Are you going to be offering a dividend reinvestment program?

We’ve looked into that. It’s something on the consideration with our broker. It seems to be of slight interest only with received unit interest in that program. So – and that is something that we’ve recently heard that that was of interest. So Kevin Scull will look into that.

Thank you.

And our next question comes from Jeff Geygan. Your line is open.

Thank you. Good morning nice quarter. Simon, I'm a little curious, you hired Bill Botti and then Brian Gilbertson, and now Jacqui Nyborg, if I’m saying that right. And clearly Bill and Brian have had noticeable impacts on the business. But what should we expect from Jacqui and do you have other potential recruits in line, of course, without mentioning names, but just to gives us a little color in terms of how the personnel side of your business might change.

Okay, I’ll let Bill to handle in terms of the addition of Jacqui, she reports to Bill. On an overall basis, we’ve gone through a significant transition in terms of our internal [indiscernible]. We are transitioning the company to even add more value and to really focus on that value add play. And I think achieve this announcement is a perfect example of that the converged backup solution. One device, plug and play kind of setup for our customers’ significant margins to them, higher margins for us. And these are products that are not switch a turnover. We could switch, take market share from our competitors, and the millions flow in next week. These are higher margin lines and there is a high demand for that. So we focus on that. Brian has done very well so far. He’s bringing on – he’s our Senior Director of Business Development. He is really focused on bringing on new publishers. There is always churn in publishers, some say good bye to us, some margins are getting – starting to come on the pressure as more – as broad line is takeover. And so, we have to continue to keep that pipeline up and healthy, and he has done, so I’m extremely happy with that and so as the board as well as Bill. In terms of Jacqui Nyborg, in terms of marketing, we really want to focus on adding value in terms of a website and the interaction with our customers and I’ll let Bill to expand on it.

Thanks, Simon. Hello, Jeff. Good morning. And one of the key elements in driving new publishers and providing a demonstrable ROI to existing publishers, which helps retention and their integrated margins, is by having very effective marketing programs, being able to provide them through the marketing efforts a pipeline and forecast. Using all the infrastructure tools, we already have in place more, more campaigns with multiple vendors simultaneously around the solution discussion that we’ve been talking about now for a few quarters. And so that dynamic change over the marking direction required a new leader and that’s what we’ve accomplished. And so, we’re looking forward to both improving our web presence, our social media presence, and providing radio ROI to our publishers through this process.

Thanks. And if I can follow-up on that with regard to Brian’s work in the marketplace, you’ve announced a few new publishers. And I thought I heard you say you had several announcements to make forthcoming. Can you put a little color on what makes a good publisher or what those qualities are? And during that can you also discuss margin – potential margin expansion on the Lifeboat side of the business as the TechXtend business becomes less and less relevant?

So a couple of answers to that question, one, of course, without giving you forward-looking statements around the publishers we’re bringing aboard. We have already signed four existing agreements with publishers to bring them to market, some during Q4, some during Q1 with an additional, probably four or five agreements will get signed between now and the end of the year for launch into early next year. That those margins because several leading technology companies vary from low to medium to high because – but we’re focusing on are where do they fit in our solution stack, how do we put product A, B, and C together to present solution D to our resellers and provide additional margin in the GP on a per transaction basis. That ties back in engineering that ties back into the field sales that ties back into marketing. So what Brian is putting together is how do these things all go together to fill out voids in that parameter. And so it’s an exciting time as we bring those on. Relevant to TechXtend, a lot of the decline on the TechXtend has been around the large flexible payment option transactions, which tend to be lower margin. As you know, Jeff, last year, we’ve talked about realigning TechXtend to focus in New Jersey and the Northeast. Our New Jersey revenues, from the team, are up 27% over last year. In this marketplace, the margins are going up. So it’s a slow process that change the selling cycles and the selling process of the team, but they are still contributing very significantly to our overall growth strategies. And we continue to realign and invest in TechXtend with staffs. When you make these kinds of changes, some people don’t want to embrace change, and have that – who we might chase kind of mentality and they decide to leave and we then bring on new people, who are excited about the opportunity. So we are all very personally excited about how that is evolving, so it is a slow process.

Guys, thank you, I appreciate it, and I will ask Simon a little more question if I may and then hop off here. Simon, you have a fair amount of cash, I view that as a positive. I think you’ve done an outstanding job over the years of managing your balance sheet. With the notion that of TechXtend is more of a regional player, would it makes sense to try and acquire some bolt-on acquisitions that could increase the TechXtend footprint in a targeted area.

So in terms of acquisitions – and I’ll address bulk size of our company, in terms of acquisitions, the reason – the main reason that we’ve realigned TechXtend is the fact that – again and it comes back to Peter’s question in terms of do we have volume or value. And what we have done, we were a volume player as Programmer's Paradise and over the years that catalog business went away. And we try to continue to play that volume gain with the larger players in that area. That did not work. So in terms of acquisitions for TechXtend, one-on-one would be – maybe two, not necessarily though because people will be anxious. A lot of our customers compete with TechXtend, the smaller VARs compete with TechXtend – some of the smaller local VARs compete with TechXtend. I’m excited about the growth opportunities for TechXtend. One thing it really does for us also on the Lifeboat side is A) we have motivated team, a very motivated team, a good structure currently on TechXtend that is ready to expand. And what it does for us, it kind of – these are the early adopters. This is the new technology so to say. So if we see that happening on the TechXtend side, we know that will translate into little down the road into larger volume with a larger place. And those are the guys that we have along the Lifeboat distribution. So for us it’s a perfect feeding machine in terms of Lifeboat. What is the new technology that is out there in a couple of months, quarters or years? So that’s the reason we remain excited about TechXtend and it’s a great team. If you talk about Lifeboat distribution, yes, we are looking at acquisitions there. And fortunately, there are not many small focus distributors left. We’ve been looking for a couple of years. As a board and as a shareholder, I would be not doing my job, if I'm not continued to look at acquisitions. One of the areas that we’re also looking in terms of acquisition is there a small software publisher, a focused software publisher with much higher margins that we could add to our offerings to our customers, something that they need and that would bring us higher margins. So that is something that we just reignited again at the last board meeting and we continue to look forward to. I don’t expect something to be able to announce something in three months, but that is on our radar that we’re actively expanding on radar to see if there are such opportunities. Having that said, the company – this company in 1995 went through a period of acquisitions. As many other companies we noted that a large portion of acquisitions do not work out and do not achieve the excepted results. So we are also in that area moving conservatively forward. And a reason for that is we have done extremely well over the last 10 years, over the last five years, over the last three years. And we want to keep that going. And with our – with a number of our employees, there’s only so much that we can focus on and there’s so much going on in our market software-as-a-service that we’re addressing, expanding our professional services, adding on new publishers and larger competitors are really turning us. I said before they are declining, its anemic growth, they are restructuring in last layoffs whole teams are restructured. There is so much going on and that affects customer service. So we are looking at their customers in terms of software publishers are going to come to us we’re a steady ship, we’re growing, we know what we do, we add value. And that’s what we expect to look forward. And we’re working hard every day. And sometimes we have some success, sometimes we have it now wins, I don’t want to call them losses, but there are no wins. And that happens, but overall, I think, we’re really well-positioned to take advantage of that market.

I appreciate your thoughts Nynens. So just to clarify has you company owned a publisher in the past?

Way, way in the past we have, yes that was part of Dan Bricklin’s demo-it! this was in late 80’s early 90’s, I believe, before my time and before we went public.

Yes just for quick, the CBUS is kind of an integrated solution using two of our suppliers. And if there are products that don’t compete with existing suppliers, that are software companies that can be a part of an integrated solution that we can take software publisher margins on, that’s one avenue. If it’s very small and it’s a great technology, and again we don’t have a major competitive product in our portfolio and their only struggle is their relative [ph] market. Then there is a couple of ways for that to occur, one, is for them to pay a lot of margins, try to get the other ways, to partner with somebody who is an emerging technology, value-added distributor to take them there more quickly and that also improves us. So it’s a just a matter of finding the right guys and change that dynamic. And also in that point if we did find somebody who would have a very positive impact on our margins.

I appreciate that as a shareholder it’s been a pleasure to watch you execute on your business plan. I know it hasn’t really been reflected that well in the share price, but this will follow my only thought again as a shareholder is to encourage you to stick with a new circle of confidence. And obviously, you do what you do very, very well. And I want why you do distress for margin and potentially disrupt the great business that you have. Thank you for your time today and good luck.

Thank you, Jeff. I really appreciate those words.

At this time, there are no further questions. Please continue with any closing remarks.

I’d like to thank our employees for their hard work this quarter. We look forward to Q4 and I would like to thank our shareholders for their interest in our company. And we look forward to reporting our Q4 and full-year results early February of next year. Thank you.

This concludes today’s conference. You may disconnect at this time and thank you for your participation.