Climb Global Solutions, Inc. (CLMB) Q2 2017 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. 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. Ms. Caponigro, you may begin your conference at this time.

Thank you and good morning. Welcome to Wayside Technology's Second Quarter 2017 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 comments about the webcast for this earnings call. We released earnings for the second quarter at approximately 5:00 PM Eastern Time, Thursday, July 27, 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 associated webcast contain time-sensitive information that is accurate only as of today, July 28, 2017. 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 everyone. We are pleased to report solid financial results. Our Lifeboat Distribution segment continued to deliver a year-over-year sales growth, while our TechXtend division was down as compared to an exceptionally strong quarter last year. On a year-to-date basis, our earnings per share are up $0.04 or 7%. Our Lifeboat division represented 93% of our revenue and 86% of segment income in the second quarter. Our international sales were 13% of our overall revenue, equal to the second quarter of 2016. Now I would like to hand it over to Bill Botti, our Executive Vice President.

Thank you, Simon. As stated early by Simon, we had a solid quarter when compared with Q2 2016. In Q2 2017, Lifeboat grew year-over-year; however, TechXtend was down year-over-year due to the strong quarter last year, based upon a very larger extended payment transaction. Net sales decrease 2% to $103 million compared to $105 million in Q2 2016. Lifeboat’s net sales increased 7% to $96 million compared to $90 million in Q2 of 2016. TechXtend sales for the quarter decrease 53% to $7 million compared to $16 million in Q2 of 2016. This decrease was primarily due to a single $7.3 million enterprise sale in Q2 of 2016. Gross profit for the quarter decreased 6% to $6.6 million compared to $7 million for the same period in 2016. Lifeboat’s gross profit increased 1% to $5.6 million compared to $5.5 million in the same period in 2016. TechXtend’s quarterly gross profit decreased to 34% to $1 million compared to $1.5 million in Q2 of 2016. Gross profit margin, which is gross profit as a percentage of net sales, for the quarter decrease by 0.3 percentage points to 6.4% compared to 6.7% for the same period of 2016. Lifeboat’s gross margin percentage decreased by 5.3 percentage points to 5.9% compared to 6.2% for the same period last year. TechXtend’s gross profit margin increased 3.8 percentage points to 13.1% compared to 9.3% for the same period in 2016. We introduced three new vendors into the channel through Lifeboat, including the return of a key partner that left us at the end of 2015, to go to an exclusive distribution arrangement with a large volume distributor. While that went well for them, they recognize they were missing a key part of market that they had through Lifeboat and elected return to our portfolio. We continue to be excited of 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. Now I hand it over to Michael Vesey. Mike?

Thanks, Simon. I’ll now review our operating expenses and balance sheet highlights. Total SG&A expenses for the quarter increased slightly from the same period last year to $4.8 million. The increase was mainly due to salary commission and incentive payments to support our growth. SG&A expenses as a percentage of net sales increased to 4.7% compared to 4.5% for the same period last year, reflecting relatively flat expenses in relation to a lower sales number. As Bill noted, net income for the second quarter decreased 16% to $1.3 million compared to $1.5 million last year, primarily due to a large enterprise sale we had in the 2016 results. Diluted net income per share decreased 12% to $0.30 per share compared to $0.34 in the same period of last year. Weighted average diluted shares outstanding decreased about 5% from the prior year, reflecting share repurchased we’ve made over the past year. On a year-to-date basis, our net income is relatively flat year-over-year $2.6 million and our diluted earnings per share is up 7%, reflecting the lower weighted average shares outstanding resulting from the share repurchases. Moving on to the balance sheet. Cash and cash equivalents was $9.7 million at the end of the quarter compared to $13.5 million at the end of 2016. Our cash balance reflects an increased investment in working capital and $3.9 million of cash utilized to pay dividends and repurchase our stock. The increase in working capital was mainly driven by higher receivables related to increased payment terms for one of our major resellers and the impact of extended payment term sales. We've had strong sales under extended payment terms over the past several quarters, particularly in the fourth quarter of 2016 and our TechXtend segment. Therefore, we incurred the use of cash to purchase the goods sold during the first part of 2017 and will collect the proceeds from the customer over time. During the quarter, we paid $800,000 in dividends and utilized $700,000 of our cash balance to purchase about 34,000 shares of our common stock. As of June 30, 2017, we had no outstanding balances under our credit facility. Stockholders’ equity was about $37.4 million compared to $37.6 million at the end of the year, and total working capital, including cash, was $22.8 million compared to $24 million at the end of last year. Additionally, we have about $12 million in extended term receivables due after one year compared to about $11.1 million last year. We plan to continue to utilize our cash and available liquidity to invest in the growth of our business. On July 25, 2017, the Board of Directors declared a dividend of $0.17 per share payable on August 18th to the shareholders of record on August 11, 2017. In conclusion, our quarter was impacted by variability in sales in our TechXtend business. Our core Lifeboat Distribution business continued its top line growth. Despite the challenging comparison with prior year's second quarter, our net income is even with last year on a year-to-date, and then earnings per share reflects the positive impact of our share repurchases. Simon, I turn it back to you.

Thank you, Mike. We are excited about the prospects of more software publishers joining us, and we look forward to growing our business. Operator, we can now start with the Q&A session.

[Operator Instructions] Our first question comes from [Burt Bulskin]. Your line is open.

Good morning, Simon. Lifeboat over the years is being growing nicely, steadily, and pretty difficult business and I can measure on that. But as a shareholder, this TechXtend drives me nuts. One quarter I think they are doing better. And I clearly reduced the company’s balance sheet within the next quarter. It’s not there, and is this fixable? Is this -- what’s the long-term prognosis with TechXtend, other than occasionally getting a big order? I’m not…

So here is the deal on TechXtend. And to just explain that to you, the TechXtend, this is, it’s two parts to that. One is, we have the flexible payment option deals. Those are multi-year or multi-quarter kind of arrangements with clients, and they come to us for this offer, but they also come to us for spreading their payments to aligning that with their budgets. That is a very flexible business. The core of this of TechXtend is that true value-added reseller part to our clients moving from a catalogue company in the ‘90s to now we’re installing security cameras on court houses here locally and New Jersey. So that does really that. This has transformed nicely, and you can that as an increase in terms of gross margin and that basis in and of itself we expect to growth. It has impacted, however, you see these flexible payment option deals by this large deals, enterprise deals that we try to get and refuse for the excess cash, we’re working on with a capital firm to use third-party cash to good as business. But I’m not going to say no through $6 or $7 million deal if that’s money into our pocket and it fluctuates, therefore, and I thing it’s good for the bottom line. Wee ultimately managed down through the earnings per share, and likely we student before, was are stewards of this company, and I’m in the same boat as you are. I’m large share holder. Our long-term plan is for Lifeboat to start growing even more aggressively than it has been. Or we believe we’re at great position, the large main stream distributors either now in private hands or in restructuring or merging. We stay true that core. We distribute software, and hardware appliances if they tie into the software, like I said, we’re right on track. Our customer service is really appreciated. We know where we go back in terms of TechXtend – I really think that the core business found it’s nature. I’m actually pretty excited about the core business, so that’s why we are long term.

And how -- clearly these bigger deals and that are predictable is no way to manage them? Is that right? Just kind of come along at the rim of the customer?

Well, if we win them -- there is also competitive force that work, while other companies suddenly have incentive to for their sales reps to have these deals done in these two quarters to take any business that they can and they’ve come and go kind of mentality. So we see this as add-on business. We try to emphasize that in the call, as we did last year as well in saying, hey this was influenced by a large FPO, it's more like on a year-to-date you can make or break that quarter, unlike what is just we continued to grow, and as that grows the impact of these kind of deals will lessen.

Over the years, you've never had an issue with the receivables on these deals. Give me some comfort that you won't have any issue going forward on these larger deals. How do you [indiscernible] balance sheet?

Thank you and I appreciate that you ask. So our write-off history -- over the 16 years that we've done it, I think it's less than -- Kevin Scull is with me, I think it's less than a $150,000. Yeah, so as a percentage, it's 0.001% of all the deals. Now, I got to tell you, we would have done the deal with Lehman Brothers. I would have done that. So we try to restrict ourselves to high-quality credit, but that's another reason that we're walking into in terms growing Lifeboat now. We're using more and more capital to finance the growth in Lifeboat. So, we're looking – listen, we had a lot of excess cash on our balance sheet and we were and we still are looking for that right acquisition. And let us heat it up. Like we said, we fired an investment banker. We're definitely reviewing more deals than we had in the past, but we have that excess cash. And years ago we said we're going to start paying some of that excess cash back to our shareholders, which we start to doing with the dividend yield. The excess cash that we had on our balance sheet was invested in very low interest deals. And then we found out that there are -- that we can do a multiyear deal with a client, very high respected client, and we can enhance our sales that way. So, we review the credit in much detail. We haven't had any major write-offs so to speak off. So that's where we are.

Okay. All right. Thank you. Continue the good success.

Yeah, but trust me, we fight as hard as we can to produce the numbers that we had in the first quarter. That is our goal, trust me.

Okay, thank you.

Our next question comes from [Peter Lux] Your line is open.

Hey, Simon. How are you doing?

Hey. Good morning, Peter.

A couple of things. You and I go back a long time may be – stockholders have the longstanding. And as far as I know, we’ve been looks for an acquisition since the year one. So although that sounds good, it never has happened, and hopefully at some point it will be an accretive deal, but I don't have any hopes. But some of the excess cash we've been thinking about perhaps in addition to buying shares bumping the dividend, I now you talked about that items and items quarter after quarter and we typically tend to hoard our cash and have used it to buy shares, which is a way to give the money back to the shareholders. But is it right now time to sort of bump the dividend in your opinion and the board's feeling?

Peter, we have a lot of confidence in the future of our company. The dividend declared was definitely discussed at our Board meeting and something we will discuss again in the future. We keep a very close eye on the level of dividend. You and I talk, and we were looking at acquisitions. I think our stock price was at $3 when we talked, and then also think that over the 14 years that, as you said, you have been waiting. I think we’ve paid out more than $50 million in dividends. We have market cap of $9 million, and if you look at our standard receivables, which is basically excess cash that reviews including our cash. We’re still very healthy level. So we returned and enormous amount of cash to the share holders. In addition, we brought back shares. We are a growth company. That is also a task, and that’s rare. And especially considering our stellar balance sheet, we are going to use our balance sheet to leave forward, but we have to built on a good basis. And it is nice to do things very rapidly, as I said before, you met me day 1, this is a multi decade plan. This is not a two year plan to ramp up sales and then dump the stock and leave. That was not never our plan. We are building a real company, and unfortunately, that takes time.

I have spoken, I guess -- isn’t a Bill Botti. One of the things you and I’ve talked about adding new publishers and I have given him a significant leads and he never follow them. If he wants to give me a call, I can refresh that within, but this is a company that I know pretty well out here in Ohio that he should be talking to, you guys should be talking to. So perhaps you should have informed me.

Absolutely. And that’s -- adding publishers is our number one priority and we manage that very closely, but definitely I think we could take it off then and Bill can explain to you why or why what progress or why there was no progress made. I’m sure there is an explanation, but I will appreciate your support and passion, Peter.

Okay. And I’ve one other thing, and I just let you go, good luck. But I noticed there is an issue over the time, the liquidity factor, the way the stock trades that gaps and trading and so forth, and I did notice that Kevin, who I know for a while did liquidate some shares, and [indiscernible] during the year. I think it was 3,400 or something like that. Did the company buy back the shares or they de-sell them in market, which would be more difficult than selling 3,400 shares in one time.

No, we sold them in market. And I’ve sold shares over the years than as of most – I mean, there’re not a lot shares that we sold. Those are minor amount of sales what I feel, but that’s – I’ve talked to shareholders. The movement of those shares, it’s pretty liquid. If you large position, it’s pretty liquid. It’s just that it’s not lot of buying and selling, and we are not the only company in that -- there is a lot of our companies and having start desire for more aggressive growth.

Listen, I will watching. Bill, call me, and we will talk again. Good luck.

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

Thank you. We appreciate everyone’s support and attention to our – interest in our company. We look-forward to company we look forward to reporting our Q3 numbers at the end of the October this year. Thank you so much.

Thank you. This concludes today conference. You may disconnect at this time. Thank you for your presentation.