Climb Global Solutions, Inc. (CLMB) Q4 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 will be 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.

Thank you, and good morning. Welcome to Wayside Technology's Fourth 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 call. We released earnings for the fourth quarter at approximately 5:00 PM Eastern Time, Tuesday, February 27, 2018. 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 28, 2018. 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, 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. Excuse my voice, I do have a cold. First, we appreciate everyone's patience as we work through the adopting of the new accounting rules related to revenue. The company will adopt ASC 606, Revenue from Contracts with Customers effective the 1st of January, 2018 using the so-called Retrospective Adoption Method. Now, Mike Vesey will go into the details. Let me start by saying that the change from gross sales to net reporting has no impact on gross profit, net income, or cash flows. What it will do is change the amount of revenue and as gross profit in dollars will stay the same, it will significantly increase our gross margin percentage. In addition, we have to account some new tax laws. We've recorded 1.6 million provision for income taxes in the fourth quarter. This increased our overall taxes to 3.5 million for the entire year. The new U.S. tax law is expected to significantly benefit our 2008 tax rate with an expected adjusted tax rate of approximately 24% to 26%. I want to thank our accounting, finance, and IT teams as they work diligently and extremely hard to get all this done. Second, I want to welcome Jeff Geygan to our Board of Directors effective yesterday, February 27, 2018. Jeff is President and CEO of Global Value Investment Corp., an investment research and advisory services firm he founded in 2007. The firm manages assets for individual and institutional clients across the United Sates, while investing on a global basis. Jeff has over 30 years of experience in the finance industry, and is an expert in financial statement analysis. We are looking forward to the insights Jeff provides from the perspective of an investor in our company as we strive to build long-term value for our stakeholders. Moving on to our business; as we stated before, we really run and manage our divisions on gross profit attainment. Lifeboat performed very well this year with a 4% increase in gross profit over another strong year. Q4 comparison was impacted by a strong Q4 2016, yet still increased slightly. For TechXtend, after Q4, gross profit increased in 2006 by $600,000, we declined by the same amount in Q4 2017. We had the opportunity to close several large deals in the fourth quarter of 2016. Yet unfortunately, we did not have the same opportunities this year. Regarding our net income, the additional reserve for taxes in the fourth quarter of $600,000 is the main reason that our net income is down compared to last year. The other drivers were a decline in the TechXtend business due to those lower extended payment term sales, and an increase in general and administrative Expenses, primarily due to higher employee-related and other expenses to support our growth and compliance as a public company. We continue to have a very strong balance sheet without any debt, despite the fact that we paid 3.1 million in dividends, and bought back $3 million in stock buybacks during 2017, our equity increased by $1.1 million. Looking at the future, we have expanded our management team early January 2018. Dale Foster and Charles Bass joined us and we look forward to expanding our reach into the channel and expanding our reach into the vendor community. Considering the continued substantial increase in our Lifeboat Distribution business, we made a strategic decision to recruit talent, improve services and to expand our field sales teams. We believe that these investments are not only appropriate, but necessary to enhance our reach and position and fuel future growth. We will continue to invest in our future by hiring new talent and adding new vendor partnerships. Looking at the valuation as a company, we believe that our stock price does not properly reflect our value. We've been consistently profitable and we believe we are undervalued as compared to our peers and the overall market, especially considering that our current dividend yield is over 5% and a tax rate that will go from over 35% to current estimates of 24% to 26% for 2018 and beyond. We have the authorization to buy back an additional 548,000 shares. We are excited about the prospect of more software publishers joining us. Employee, customer and vendor feedback confirms that we are on the right track. Our corporate culture and customer service are outstanding. We care and our employees, our vendors and our customers know this. We look forward to a great 2018. Now I would like to hand it over to Mike Vesey, our Chief Financial Officer to report the financials.

Thanks, Simon. I'll review our financial results for the fourth quarter, earnings per share for the quarter in the year and then discuss our balance sheet and liquidity. Overall net sales for the quarter increased 6% to $127 million compared to $120 million for the same quarter of last year. Lifeboat Distribution net sales were up 14% for the quarter to $117 million. While TechXtend net sales for the quarter were down 44% to $10 million. As Simon mentioned, the decrease in TechXtend sales was primarily driven by lower extended payment term sales, which tend to fluctuate from period-to-period based on market opportunity and internal capital allocation decisions. As previously discussed, we had a high level of those sales in Q4 last year causing a difficult comparison this year. Gross profit for the quarter, decrease 6% to $7.5 million compared to $8 million for the same period of last year, reflecting the decrease in extended payment sales. Lifeboat Distribution gross profit for the quarter increased slightly to $6.3 million from $6.2 million in 2016. While TechXtend segment gross profit decreased 34% or $600,000 compared to Q4 last year. On a full year basis, gross profit margin as a percentage of net sales decreased by 500 basis points to 6% compared to 6.5% in the prior year. The decline has the result of two factors continued price competition and a shift in product mix to our subscription and maintenance products, which typically carry a lower gross profit as a percent of sales when compared to hardware and perpetual license products. Total SG&A expenses for the quarter decreased slightly to $5 million, compared to $5.1 million for the same quarter in 2016 due to lower personnel related expenses. SG&A expenses as a percent of net sales was 4.3% in 2017 compared to 4.5% in 2016. For the fourth quarter of 2017 provision for income taxes of $1.6 million compared to $1 million in the prior year. The 2017 tax expense includes charges of $200,000 resulting from the revaluation of deferred tax assets and the transition tax for foreign un-repatriated earnings under the Tax Cuts and Jobs Act of 2017. Our provision also includes approximately $400,000 related to state income taxes for states that have implemented economic nexus statutes for sales of digital goods. The tax adjustments impact our EPS by approximately $0.14 in the current year. However, we expect to benefit from the lower corporate tax rates in 2018 as a result of the Tax Cut and Jobs Act of 2017. We expect an effective tax rate in the range of 24% to 26% next year. Net income for the fourth quarter of 2017 decreased 43% to $1.1 million compared to $2 million in the prior year. The decrease in earnings was primarily due to the income tax charges and a declining gross margin in our TechXtend business. As Simon noted, our TechXtend business was down this year due to the lower extended payment term sales, which are largely dependent on cash availability and market opportunity as we pay for products and services upfront and collect from the customer over time. We operated with a lower cash balance in 2017 limiting opportunities to invest in these sales. In contrast, our core TechXtend Lifeboat businesses require less capital to operate and are characterized by a much shorter cash conversion cycle and higher returns on invested capital. 2017 performance in these businesses were more in line with the historical growth pattern. More information on segment performance will be available on our 10-K to be filed shortly. Diluted earnings per share for the fourth quarter of 2017 decreased 42% to $0.25 compared to $0.43 for the same period in 2016. Diluted earnings per share for the full year 2017 decreased 10% to a $0.13 compared to a $0.25 for 2016 on a restated basis. As noted last quarter, we recalculated and restated our previously reported earnings per share amount using the two class method to be consistent with the current year calculations. Also as previously noted, the impact of the income tax adjustments decreased EPS by approximately $0.14 in each calculation. Moving on to the balance sheet, cash and cash equivalents was $5.5 million at the end of the year compared to $13.5 million at the end of 2016. Our use of cash was the results of an increased investment in working capital and $6 million return to investors to dividends and repurchases our common stock year-to-date. The increase in working capital was primarily driven by a vendor prepayment of approximately $8 million; it was made as part of vendor agreement and the impact of a higher and average level of extended payment sales made in Q4 2016. As noted in previous quarters, the products related to the Q4 sales were paid for on the first quarter of 2017. While sales proceeds will be collected over future periods resulting in a net cash outflow in 2017. During the year, we paid $3.1 million in dividends and utilized $3 million of our cash balance to purchase approximately 165,000 shares of our common stock. As of December 31, 2017, Stockholders' equity stood at $38.7 million compared to $37.6 million at the end of the year, and total working capital, including cash, was $29.1 million compared to $24.5 million at the end of last year. On February 26, 2018, the Board of Directors declared a quarterly dividend of $0.17 per share of our common stock favorable on March 12, 2018 to shareholders a record on March 5, 2018. We plan to adopt the new revenue standard ASC 606 revenue from contracts with customers effective January 1st, 2018 is in the retrospective adoption method. Beginning in Q1 2018, we will present revenue for all periods presented, just a standard has been adopted at the beginning of each period presented. The most significant impact of adopting the standard for us relates to the recognition of revenue for third-party subscriptions, maintenance and services. Historically, we have account for most sales on a growth basis with third-party cost including cost of sales. Under the new standard, we will account for revenues from the self-maintenance service and software subscriptions for products on a net basis. The change from growth sales to net reporting has no impact on gross profit net income or cash flows. However, we will increase gross profit as percentage of sales. The adoption of the standard is expected to result and the reduction of net revenue and corresponding reduction of cost of sales of $288.8 million, $253.5 million and $218.4 million for 2017, 2016 and 2015 respectively. We have attached cable summarizing impact of the adoption to our financial statements and will include additional information in our 10-K which will be filed shortly. Simon?

Thank you. Sorry, operator, we can now start with the Q&A.

Hey, Simon, how are you?

Hi, good morning.

People come, people go, but I think you and I are the only constants that have been around for all the time. With that said, I think it's fair for me to make a comment given the stock performance over the last year or so, and basically not making a ripple in the investment community, I was curious to know what your plan is to sort of raise the profile of the company.

So Peter, as the largest shareholder in this company, I share your frustration in terms of share price. In order to raise our profile, we need to raise our profile first. And as I said before, in terms of our performance, and that performance is impacted by our investments. We need to invest in our future growth. We are doing that. And we are reaching out to the community. In terms of where do we - in terms of the share price, that is unfortunately, we are a market as many other public companies with a small float, and if somebody decides to start selling a certain - amount of shares that could have a significant impact on our share price, I do not think personally that it reflects fair value, and I've stated so at the comments.

Just a follow-up, given that as a public company, we don't really take advantage of being a public company and it actually cost us a lot for filings, et cetera, perhaps being a private company would be better for all parties concerned?

We do explore strategic alternatives, and we're looking at all options to create value for shareholders.

[Operator Instructions] You have a question from the line of Jim [indiscernible].

Yes, hi Simon, this is Jim.

Hi, Jim. Good morning.

Good morning. How are you?

Good. I have a cold.

So where do you - you obviously have a great balance sheet, and you're growing your revenues. And this new adoption of the plan that will raise your gross margins and lower your revenues, could you explain a little bit about how that works? And also, where do you see the great opportunities in the future for you, because you've obviously been a dynamic growth company that people are not really understanding.

So, first let me explain to you, like that, a little bit; I don't want to step on my [PCs] [ph] and our auditors toes, but just for layman terms, right, how we look at that as a business. We are dependent on the percentage of gross margin of a deal. So we look at an overall deal. And let's say it's a $100, and we look at that, what is in that for us. In terms of accounting, there are accounting rules that say, hey, if that's - are you a net - can you record that as net revenue, is it the five, let's say it's 5% or 10%, let's say it's 10% of the $100, can you record the $10 as revenue or should you report $100 as revenue? Now every public company is implementing these new rules, and some with large impact, some with small impact. For us, in terms of the way we run our business, this doesn't change it. Internally we look at - we continue to look at a deal and say, Okay, what's the accounts receivable risk, and we will include in our financial statements, if I'm correct, and Mike Vesey, I'm correct in this, a line that says, Gross bookings. We will include in those statements the information so you can see what the gross bookings are. But in addition, we now have to record that as every other company according to these new accounting rules, and we've decided to adopt that. It doesn't change our business. What we have to do to change our business, and right now we see large distributors, like I said before, there are either restructuring or under own growth path, what we've decided, what we do and we stick to that, is providing that way to the channel for all the upcoming software vendors that are out there, all the upcoming hardware vendors. We just recently announced more partnerships, and we look forward to expanding more partnerships. And when we can sell into a very happy and pleased customer base, we expect to drive results through that.

Well, a follow-up to that, and I appreciate that, is you had started a program or initiated a program where you were effectively operating some company stores, is that continuing to be a potential avenue for you to grow?

Yes, we do look at that as well. Absolutely, yes.

Okay, thanks.

All right, you are welcome.

There are no other questions at this time.

We thank everybody for their interest, and we look forward to reporting our first quarter results in the end of April or the beginning of May of this year. Thank you so much.

Thank you again for joining today's call. This concludes today's conference. You may now disconnect.