Climb Global Solutions, Inc. (CLMB) Q4 2016 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to 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. Please note, that all callers 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 your host for today's Conference, Melanie Caponigro. Miss. Caponigro, you may begin your conference at this time.

Thank you and good morning. Welcome to Wayside Technology's fourth quarter 2016 earnings call. Before turning the call over to Simon Nynens, the company's Chairman and CEO, I will dispense with the customary cautionary language and comment about the webcast for this earnings call. We released earnings for the fourth quarter at approximately 05:00 PM Eastern Time, Thursday, February 2, 2017. 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/site/content/webcast. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, February 3, 2017. A detailed discussion of risks and uncertainties are discussed in our Form 10-Q and also in greater detail in our Form 10-K. Wayside Technology Group Inc. sees no obligation to update and does intend to update any forward-looking statement. Now I would like to turn the call over to Simon Nynens.

Thank you Melanie and good morning to everyone. We had a great fourth quarter. Our net income for the fourth quarter increased 22% to $2 million compared to $1.6 million during same period last year and diluted earnings per share increased 29% to $0.45 and we are up 5% for the year. Our Lifeboat division represented 88% of our revenue and 84% of segment income in the fourth quarter. Our international sales were 12% of our overall revenue, down from 15% for Q4 of 2015. I want to start by congratulating Kevin Askew as our Vice President and General Manager for TechXtend. Kevin was promoted in January and he has been with us since 2010 and has been our Senior Director of Sales and Marketing for TechXtend since 2014. Now I would like to hand it over to Bill Botti, our Executive Vice President.

Thank you Simon. As stated earlier by Simon, we had a solid quarter when compared with a good Q4 in 2015. In 2016, we grew revenue in all geographies and business units and did the same in gross profit dollars in most of them. Net sales for the quarter ended December 31, 2016 increased 20% to $120 million compared to $99.8 million for the same period in 2015. Lifeboat Distribution segment net sales for the quarter ended December 31, 2016 increased 15% to $102.4 million, compared to $89.4 million for the same period in 2015. TechXtend segment net sales for the quarter ended December 31, 2016 increased 70% to $17.6 million, compared to $10.4 million for the same period in 2015. The increase in TechXtend sales was primarily driven by large extended payment term sales. Net sales for the year ended December 31, 2016 increased 9% to $418.1 million compared to $382.1 million for the same period in 2015. Lifeboat segment net sales for the year ended December 31, 2016 increased 9% to $369.5 million, compared to $339.7 million for the same period in 2015. TechXtend segment net sales during the year ended December 31, 2016 increased 15% to $48.6 million, compared to $42.4 million for the same period in 2015. Gross profit for the quarter ended December 31, 2016 increased 16% to $8 million compared to $6.9 million for the same period in 2015. Lifeboat Distribution gross profit for the quarter ended December 31, 2016 increased 9% to $6.2 million, compared to $5.7 million for the same period in 2015. TechXtend gross profit for the fourth quarter of 2016 increased 48% to $1.8 million, compared to $1.2 million for 2015. Gross profit for the year ended December 31, 2016 increased 3% to $27.3 million, compared to $26.6 million for the same period in 2015. And Lifeboat Distribution segment gross profit for the year ended December 31, 2016 increased 4% to $22.3 million, compared to $21.5 million for the same period in 2015. TechXtend gross profit remained constant at approximately $5 million for the years ended December 31, 2016 and 2015. Gross profit margin, gross profit as a percentage of net sales, for the year ended December 31 decreased by 0.5 percentage points to 6.5%, compared to 7% for the year ended December 31, 2015. Lifeboat Distribution segment gross profit margin for the year ended December 31, 2016 decreased by 0.3 percentage points to 6%, compared to 6.3% for the year ended December 31, 2015. And TechXtend gross profit margin for the year ended December 31, 2016 decreased 1.7 percentage points to 10.2%, compared to 11.9% for the year ended December 31, 2015. Net income for the quarter ended December 31, 2016 increased 22% to $2 million, compared to $1.6 million during same period last year. Net income for the year ended December 31, 2016 increased 1% to $5.9 million, compared to $5.8 million during the prior year. We continue to face margin pressure from the very large distribution companies we compete with in the market. We managed to overcome most of that with increases in most of our vendors and customers. Some segment had increases while others decreased due to these pressures. Like to update, so Lifeboat and TechXtend last quarter, we released a new Wayside Technology logo, brand website and refreshed our brand image with very positive feedback from customers and suppliers. With operations for Lifeboat being turned over Brian Gilbertson in mid-2016 and the recent promotion of Kevin Askew to run operations for TechXtend, this affords me the opportunity to focus my efforts on working with them on our strategy and to spend more time with customers and vendors. We continue to be excited about our future as we manage our expenses and build our product portfolio to help achieve our growth targets. Thank you. Simon, back to you.

Thank you Bill. Mike Vesey will now report on the financial numbers. Mike?

Thanks Simon. I will now review our operating expenses and some balance sheet highlights. Total SG&A expenses for the fourth quarter of 2016 increased $600,000 $5.1 million, compared to $4.5 million in the same quarter last year. Total SG&A expenses for the full-year 2016 increased $600,000 or 9.4% to $18.7 million, compared to $18.1 million in 2015. The increase in SG&A expenses is mainly attributable to increased stock based compensation and employee related expenses to support our growth, costs related to our new office relocation in October 2016 and the increased public company compliance costs. SG&A expenses as a percentage of net sales actually decreased to 4.5% in 2016 compared to 4.8% in the prior year. As Bill noted, our net income for the fourth quarter of 2016 increased 22% to $2 million compared to $1.6 million in the fourth quarter last year, resulting in a slight increase to net income for the year ended December 31, 2016 to $5.9 million from $5.8 million in the prior year. Earnings per share on a fully diluted basis was $0.45 in the fourth quarter 2016, a 29% increase over the $0.35 from the same quarter last year. Full-year diluted EPS for the full-year 2016 increased 5% to $1.31 from $1.25 in the prior year. The EPS amounts reflect the impact of a lower number of outstanding shares due to our stock buyback program in addition to net income growth that Bill noted previously. Moving to our balance sheet. Cash and cash equivalents was $13.5 million at December 31, 2016 compared to $23.8 million at December 31, 2015. Our cash balance reflects the impact of a higher investment in working capital at December 31, 2016 when compared to the prior year, with accounts receivable increasing by $24.4 million to $83.3 million and long-term accounts receivable increasing $3.7 million to $11.1 million at the end of 2016. The increased receivables were mainly driven by an increase to extended payment term sales, an increase in payment terms for one of our large reseller accounts and the higher level of sales overall during the fourth quarter of 2016 when compared to the prior year. We collected about $9.5 million on two large extended payment sales we made in 2016 in the first couple of months of 2017. During the year, we paid $3.2 million in dividends and utilized $5.4 million of our cash counts to purchase approximately $309,000 of our common stock. As of December 31, 2016, we have no outstanding debt or balances under our credit facility. Working capital was $24 million at the end of the year, compared to $30.6 million at the end of the prior year. Our stockholders' equity now stands at $37.6 million compared to $38.7 million in the prior year. At our February 2, 2017 Board meeting, the Board of Directors declared a $0.17 per share dividend for its common stock payable on February 27 to shareholders of record on February 16, 2017. The company has now paid dividends consecutively for over 56 quarters. In conclusion, the company continues to have solid operating results, a strong balance sheet and is adequately capitalized to support our continued growth plans. Simon?

Thank you Mike. 2016 was truly a transformational year. New offices, new websites, new logos, new structure for our sales teams and a new way of working together. Now it is executing, focusing on our jobs, having fun and attracting even more vendors and customers. We are well settled in our new headquarters and as Bill mentioned, we released a great new website for Wayside Technology Group. We have great interest from new vendors in our offerings and we continue to invest in expanding our offerings, including services. We also received two awards this quarter, the SmartCEO New Jersey Top Corporate Culture award in November and a Future 50 award in January of this year based on revenue and employee growth in the last couple of years. We pride ourselves in providing the best possible place to work, generating great financial results, outperforming our competition. In conclusion, it was a busy quarter and a busy year and I want to thank all of our team members for their hard work and dedication to the success of our company. Operator, we can now start the Q&A session.

[Operator Instructions]. Our first question comes from Jeff Geygan. Your line is open.

Thank you. Good morning gentlemen. Hats off to your great quarter. This is really the recognition of lot of hard work that you have described in the past and it's good to see that it's coming to fruition here.

Thank you Jeff. Appreciate it.

Yes. Glad to be able to make that comment to you. You have talked a little bit about extended payment terms. I think this has come up in the past. Would you be able to elaborate a little bit on what those terms are like and why they are attractive to your customer?

Yes. So these relate to multiyear licenses. If you buy a license that is valid for three years, but your IT budget for a given year is set to a certain amount, what we are able to do is sell you the software for the full amount that you can pay us in three equal terms, the software, It's an irrevocable purchase order. You cannot return the software, but you can spread the payments according to a plan that is more viable for you in terms to cope with IT expenses within your budget. It compares a lot to Software-as-a-Service in terms of spreading out those payments equally over the time that you are using the software. We are using that, our excess cash, in order to facilitate those payments, make it really easy for vendors and customers to work with us to facilitate those transactions.

Fabulous. Previously you had announced the retention of outside advisors to consider strategic alternatives, presumably for the use of cash. Would it be fair for us to construe that this was the outcome of that conversation with your advisors? Or will there be more to come?

No. This is us operating and executing as a company. By quarter, this was not impacted at all by our outside consultants looking for acquisitions. The determination internally was made. We have a lot of excess cash. We started using that years ago to pay a dividend. We also started to buy back stock on a conservative level and we have increase the level of stock buybacks in the last couple of years because we think our stock is undervalued. And then in addition, we have used that cash internally to grow. As you saw, sales have grown up but expenses have also gone up. Considering where we are in our lifecycle, we really deem it important to continue to invest in the growth of our company, compared to our competition and compared to the possible market that we address. We haven't even gotten started yet. So we really need to continue to invest in our own team. Yet that left another sum of money in terms of the excess cash and we said, let's look at acquisitions to see if that makes sense. So we hired a consultant to go out and see what kind of possible acquisitions are made. But having that said, we’re looking at that our multiples and if you take the excess cash out of the balance sheet for which we don't seem to get a lot of recognition, we have about a PE multiple of about 7, 7.5 and a dividend yield of, what is it, Mike, What is the dividend yield?

3.7.

Yes, Close 4%. So it's hard to find acquisition that is accretive. Having that said, as we have shown in the fourth quarter, the internal opportunities are there to grow. So for us, it's a determination on where do you invest where we can reap the largest benefits. And that's a constant moving play field.

All right. It seems like you are doing a good job of that. Following up on your comment, if you think the company's stock is undervalued and I know you can't say what you think the fair value is other than your comment that it's undervalued, can you share with us how do you think about the valuation of the business in terms of what are the important metric drivers that lead you to conclusion that you shares are undervalued?

Well, I am not sure if you want to?

Yes. I think a couple of things we look at is, we benchmark ourselves against competitors. And Simon mentioned that our company trades at probably between six and seven times EBITDA and maybe 10 times earnings. And our competitors trade at higher multiples to that. They maybe getting some premium for size, but nevertheless we are growing. So we think that in the future as we continue to execute on our plan, we will be hopefully valued at similar multiples to some of the larger competitors.

We hope so too. And my final question and I know I am overstaying my welcome here, but I think it's really worth mentioning. With Brian Gilbertson, Kevin Askew and even Mike Vesey being in new roles, obviously that frees up Bill and Simon to do new and creative things to drive value. Can you talk a little bit about the conclusion of the transformation and the impact of that and how you expect your business to evolve going forward?

Yes. Jeff, this is Bill. Great question. And I think that one of the primary factors is, as we have stated in the prior quarterly calls, is the addition of new vendor product lines at the Lifeboat Distribution and we are looking at a blend of emerging technologies and some larger more well-known logos that I am working on to add to the Lifeboat and TechXtend portfolio. Those things could potentially be very significant in our next few years if we are able to close some of those. Additionally, I have a lot of great relationships at significant customers around the country that I haven't had the time to continue to foster those relationships on a regular basis. And generally, they all help benefit and drive additional business and now that I am not immersed in the day-to-day as I have been in the last couple of years since the prior VP and GMs left in 2014, I have the opportunity to go focus on the vendor and customer community and Simon and I are very optimistic about that. And should there be anything that we come across that's worth investment, then we will take a look at those as we do it. So it’s kind of an open book.

But it's exciting times that really is pivotable. For us, it was moving from the old building, moving from old websites, moving from the step that got us to where we were realizing we have to take the next step in our company's evolution and we have executed very well. Vito Legrottaglie and his IT team have made tremendous steps forwards. We are very proud of the steps that have taken to continuously enhance. And that's how we win. It's not a nuclear submarine. It's executing on a day-to-day basis. And that our teams are able to do that with the right technology and now we have the right structure in place for the next phase of our company. And to be honest with you, very exciting times for us.

Well, again, congratulations on a terrific quarter. We look forward to seeing more in the future. Thank you.

Thank you. Have a good weekend.

[Operator Instructions]. I am showing no additional audio questions at this time, sir.

Thank you. We appreciate everyone's interest in our company. We look forward to reporting our first quarter results at the end of April 2017. Thank you so much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect at this time and thank you for your participation.