Climb Global Solutions, Inc. (CLMB) Q3 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.

Thank you and good morning. Welcome to Wayside Technology's Third 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 third quarter at approximately 5:00 PM Eastern Time, Thursday, October 26, 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, October 27, 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. Despite intense market competition, we delivered satisfactory results for Q3. Net sales increased 7% and earnings per share increased $0.01 to $0.30 per share for the quarter. On a year-to-date basis our earnings per share are up $0.04 per share or 5%. Our LIBOR division represented 87% of our gross margin and 91% of segment income in the third quarter. Our cash, prepayments and long-term receivables amount to $21.8 million or 57% of our equity. I would also like to share and thank Bill Botti who announced his intention to retire from his position as Executive Vice President effective December 31, 2017. Bill will continue in his current role till the end of the year as he transitions his responsibilities to other team members, and I’d like to thank Bill on behalf of Wayside Technology Group for his great contributions during his tenure as a member of our team. Now I’d like to hand it over to Bill. Bill?

Thank you, Simon. Net sales for the quarter ended September 30, 2017, increased 7% to $107 million compared to $100 million for the same period in 2016. Lifeboat Distribution segment net sales for the quarter ended September 30, 2017, increased 10% to $100 million compared to $91 million for the same period in 2016. TechXtend segment net sales for the quarter ended September 30, 2017, decreased 24% to $6.5 million compared to $8.5 million for the same period in 2016 due to a decline in extended payment term transactions, which typically vary significantly from quarter-to-quarter based upon the timing of IT-spending decisions by our larger customers. Gross profit for the quarter ended September 30, 2017, decreased 2% to $6.2 million compared to $6.4 million for the same period in 2016. Lifeboat Distribution segment gross profit for the quarter ended September 30, 2017 and 2016 was consistent with the prior year at $5.4 million. TechXtend segment gross profit for the third quarter 2017 decreased 11% to $0.8 million compared to $0.9 million in 2016. Gross profit margin, which is gross profit as a percentage of net sales, for the quarter ended September 30, 2017, decreased by 0.5 percentage points to 5.9% compared to 6.4% for the same period in 2016. Lifeboat Distribution segment gross profit margin for the quarter ended September 30, 2017, decreased by 0.6 percentage points to 5.4% compared to 6% for the same period last year. TechXtend segment gross profit margin for the quarter ended September 30, 2017, increased 1.8 percentage points to 12.8% compared to 11% for the same period in 2016. We continue to face margin pressure from the very large distribution companies we compete within the market. This is reflected in the 0.6 points in our gross profit margin in the Lifeboat business. We continue to be excited about our future as we manage our expenses and build our product portfolio to help achieve our growth targets. As Simon stated early, I have announced my planned retirement at the end of this year. I've very much enjoyed working with Simon, the Board of Directors, the Leadership team and the staff of our Wayside Lifeboat and TechXtend teams. I'm very confident in the leadership that we've put in place for Lifeboat in Brian Gilbertson and for TechXtend in Kevin Askew. Both have been running sales operations for their businesses for most of this year, and I have high expectations for their continued effect on our growth. Thank you, Simon. Back to you.

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

Thanks, Simon. I'll review our operating expenses and some balance sheet highlights. Total SG&A expenses for the quarter increased approximately 2% from the same period last year to $4.5 million. The increase was mainly due to personnel-related expenses to support our growth and professional fees. SG&A expenses as a percentage of net sales decreased to 4.2% compared to 4.4% for the same period last year, reflecting a modest increase in expenses in relation to the rate of sales growth. As Bill and Simon noted, net income for the third quarter was down slightly from the third quarter last year at $1.3 million compared to $1.4 million in the prior year, while diluted earnings per share increased slightly due to a lower number of shares outstanding. During the quarter, we determined that we should be calculating our earnings per share using the two-class method, which treats unvested shares or restricted stocks granted under our stock compensation plan as participating securities, because these securities have a non-forfeitable right to dividends prior to vesting. Under this method, our distributed and undistributed net income is allocated between the participating securities and common shares before calculating earnings per common share. While we do not consider the impact of the change in the calculation method to be material, we did restate prior amounts in this earnings release so that historical information is on a comparable basis. The impact of restating the prior year was to decrease third quarter 2016 diluted earnings per share by $0.02 or about 4.2% and year-to-date diluted earnings per share by $0.03 or 4.3%. Basic shares outstanding is the same under the two methods. And you will also note that under the two-class method, the basic and fully diluted share count is the same since there are no other common stock equivalents other than the participating restricted stock. A table comparing the previously reported and restated amounts is included in our earnings release, and we'll provide more detail in our 10-Q. It should be noted that there was no adjustments to net income as part of this calculation. It's merely a recalculation of the earnings per share itself. So on a restated and comparable basis, diluted net income per share increased 2% to $0.30 for the quarter compared to $0.29 in the same period last year. Weighted average diluted shares outstanding decreased about 5% from the same quarter last year, reflecting share repurchases we made over the past 12 months. On a year-to-date basis, our net income was relatively flat year-over-year at $3.9 million. And our diluted earnings per share is up about 5%, reflecting the lower weighted average shares outstanding resulting from the share repurchases. Moving on to our balance sheet. Cash and cash equivalents was $4.1 million at the end of the quarter compared to $13.5 million at the end of the year for 2016. You will also note that we utilized our revolving credit facility this quarter to fund some of our working capital needs, with $2 million outstanding at the end of the quarter. Our use of cash was the result of an increased investment in working capital and $5.1 million returned to investors through dividends and repurchase of our common stock year-to-date. The increased working capital is primarily driven by vendor prepayment of approximately $8 million that was made as part of a new-vendor agreement, and the impact of a higher-than-average level of extended payment sales in Q4 2016. The products related to the Q4 sales were paid for in the first quarter of 2017, while the sales proceeds themselves will be collected over future periods, resulting in a net out -- cash outflow in 2017. During the quarter, we paid $800,000 in dividends, and utilized about $500,000 of our cash balance to purchase approximately 28,000 shares of our common stock. As of September 30, 2017, stockholders' equity stood at $38.1 million compared to $37.6 million at the end of last year, and total working capital, including cash, was $25.5 million compared to $24 million at the end of last year. Additionally, we had about $10.2 million in extended term receivables due after one year compared to $11.1 million at the end of 2016. We plan to continue to utilize our cash and available liquidity to invest in the growth of our business. On October 24, 2017, the Board of Directors declared a dividend of $0.17 per share, payable on November 17 to shareholders of record on November 10, 2017. Now I'll turn it back over to Simon.

Thank you, Mike. I want to thank all of our team members for their hard work and dedication for the success of our company. Operator, we can now start the Q&A session.

[Operator Instructions] And our first question comes from the line of Sam Schaefer. Your line is now open.

Hi. Thank you for taking for questions today guys.

You’re welcome.

Bill, I'd like to congratulate you on your retirement. Thank you for the help that you've given us over the past few years. I really appreciate the [Indiscernible]…

Thank you very much.

With that being said, the Lifeboat has been growing top line pretty consistently, except for -- about the past four quarters, it seems to have flattened and that includes the declining margin. With Bill leaving, how are -- how is his role going to be put on to employees internally, where we can continue to see the growth in the Lifeboat moving forward?

Well, just by way of timing, we put Brian Gilbertson in the role of VP and General Manager in June of 2016. And so he took over the sales operations for that and we're continuing to grow the top line, but are seeing margin pressure as we go through these cycles, right? So as we are driving that forward, Brian has been the driving force and has been tuning, not necessarily re-architecting, but tuning the organization to prepare ourselves for continued growth as we go forward. During much of this year, my role has been to help mentor him and Kevin Askew, along with the customer and vendor relationships. So the day-to-day decision-making has already been in place. So we've internally had a -- what I like consider to be a very smooth transition, because Brian's background, if you've checked it when we did the release, he was managing a P&L at Arrow ECS in the Virtualization segment, running an $850 million business and has very strong customer and vendor ties. So I feel, as I stated, that we're in very good hands.

Okay. That answers additional color and hopefully there is no hiccup internally as that evolves. And what does the company need to do to get back to the historic margins? They're really close to the 6%, and it seems to have dropped a little bit, is that even possible moving forward?

Yes, it is. It requires several factors to go -- to get the purchase. New vendor acquisitions that have higher margins is a critical component of that as we help new technologies come to the market and introduced them into our VAR community. That is a cornerstone. One of the things that we were really challenged from, overly accelerating our revenue, if you will. It's a lot of the bigger vendors that we've talked to or engaged with either are looking to expand their distribution model and/or while they have great volumes, their margins are even a small percentage of what we're retaining. And if we add a big revenue line that's only going 1% or 2%, it's actually a dilutive to everything else we're doing. So we're being very cautious of how we bring on and -- because we could over accelerate the new vendor ramp, so we have to focus on higher margin, lower volume products and so if I had somebody at 2%, somebody at 8%, it takes four times as much revenue, of course, to get to the same GP number. And I understand without going into detail, it's difficult for you to get the overall color but when I look at our revenue stream and look at some of the changes in customer -- large customer purchases along with declining margins from vendors who are changing their margin model. In two years, we've gone from 8% to 6% to 4% on of our key vendors and yet we've made that up to retain flat. So I understand the flat line concern. But we're out here with swords and shields, fighting it everyday and making good progress.

Okay. And then lastly, just one more question from me. Over the past year and a half, the balance sheet has really changed. You're seeing cash go from about $25 million to just under $5 million. In addition, we've seen $2 million draw in the revolver, which I don't think we've seen in the past. How should we think about the use of cash moving forward as analysts?

Yes. So I just first want to address the cash portion of that. What we state as cash is cash in the bank, the $4 million. The prepayment to a vendor is also weak -- internally we look at that as cash that we've prepaid. So that's about a $7.5 million out of the $8 million, we just got started on that prepayment. So internally, we look at that as cash. And in addition, we've used our part of our excess cash to finance these long-term deals. And we're changing those long-term deals to using third-party services. Mike Vesey has been very busy in this quarter, exploring contracts with the third -- with the bank outside of our company to utilize that. As we use our cash to grow our Lifeboat business as well as by the way the core TechXtend business outside of these financing deals and you see the large impact that these financing deals have on the quarters, but I want to stress that it's not TechXtend's core business. In fact, TechXtend's core business on a year-to-date business, the gross profit has gone up. It's outside of that and we have to make sure that we communicate that correctly, is the fact that we have these large finance deals. And you see that in accounts receivable long-term, the payments that are due over a year and then the short-term accounts receivable, you see that the payments that are due within a year. All of that internally we look at as cash. So we are winding down in terms of the use of our own cash, so we expect over the next year to -- and by the way, we also -- you look at the dividend payments and at share repurchases, we expect the cash portion to go up. For instance, in Q4, I think the long-term receivables, payments for those large payment deals are expected to be, I think, about $4 million, $4.5 million.

Yes.

Yes? Correct. So that's how we look at cash and I just want to make sure that we all are looking at the same numbers. If you add those three up, the accounts receivable long-term, the prepaid cash and the cash portion itself, you get to $21.8 million.

And that vendor prepay, is that one vendor? And is this something we should expect to see moving forward? Or is this kind of a one-time benefit that the companies [Indiscernible]?

Yes, it's a one-time benefit that we've taken advantage of in this process. We do keep inventory and things, but we don't typically prepay to this degree. We just simply buy and pay for inventory. And typically, we maintain a 30 to 45-day run rate, maybe a little stronger, again, of the quarter based upon any particular vendor, but we manage that very, very tightly. So I'd say this is a one-time opportunity and we expect to pull through that here in the next several months.

Okay, great. Thank you very much. And good luck in the future.

Thank you.

[Operator Instructions]. And at this time, there are no further questions. Please continue with any closing remarks.

Thank you. We thank everyone for their interest in our company. And we look forward to reporting our year-end results at the beginning of February and 2018.

This concludes today's conference call. You may disconnect at this time. And thank you for your participation.