Good morning, everyone, and thank you for participating in today's Conference Call to discuss Wayside Technology Group's Financial Results for the Third Quarter Ended September 30, 2021. Joining us today are Wayside's CEO, Mr. Dale Foster; the company's CFO, Mr. Drew Clark; and the company's Investor Relations adviser, Mr. Sean Mansouri with Elevate IR. By now, everyone should have access to the third quarter 2021 earnings press release, which was issued yesterday afternoon at approximately 4:15 p.m. Eastern Time. The release is available in the Investor Relations section of Wayside Technology Group's Web site at waysidetechnology.com. This call will also be available for webcast replay on the company's website. Following management remarks, we'll open the call for your questions. I'd now like to turn the call over to Mr. Mansouri for introductory comments.

Thank you. Before I introduce Dale, I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any forward-looking statements, which are being made only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements. Our presentation also includes certain non-GAAP financial measures, including adjusted gross billings and adjusted EBITDA as supplemental measures of performance of our business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts and other important information in the earnings press release and Form 8-K we furnished to the SEC yesterday. I'll now turn the call over to Wayside's CEO, Dale Foster.

Thank you, Sean, and good morning, everyone. As you can see from our results in the earnings release, we had a very strong quarter. All of our teams are performing well, including our CDF team in the U.K. I spent time with them earlier this month and will add more color later in the call. We've seen a significant increase in the number of potential vendors approaching us to distribute their solutions, which continues to be encouraging. This has led us to be more selective in who we are -- who we incrementally onboard with emerging brands, while our sales and marketing teams continue to drive sales with our complete line of strategic vendors. We signed several new emerging partners during the quarter. The more notable new partnerships include new agreement with Mirantis in August. Mirantisis an open source cloud computing software company that produces leading edge container and cloud management products. Climb also entered into an agreement with Enable this past quarter to distribute their MSP solutions. Enable is a global provider of software that helps companies navigate the digital evolution. With flexibility technology platform and powerful integrations, Enable makes it easy for MSPs to monitor, manage and secure their environment. Our sales teams believe that both of these new partnerships will be significant growth drivers as we move forward. Following up on the acquisition of CDF in the U.K., we are now coming up on our 1-year anniversary of the transaction. I traveled to meet the entire team last month in the U.K., and it was clear that we made the right choice in acquiring CDF. The Climb and Grey Matter teams mirror our energy and commitment to both vendors and customers, along with their focus on growing their prospective businesses. Overall, this past year, we have seen…

Thank you, Dale. And good morning, everyone. Jumping right into our results, all comparisons and variance commentary refer to the year ago quarter, unless otherwise specified. As reported in our earnings press release, net sales in the third quarter of 2021 increased 13% to $68.9 million compared to $60.9 million. This reflects both continued organic growth and the impact from the acquisition of CDF. Excluding the acquisition, we increased net sales by $1.2 million year-over-year with CDF contributing an estimated $6.8 million. However, the more indicative number of our sales growth is, of course, adjusted gross billings. A non-GAAP measure, which increased 33% to $226.9 million compared to $171.0 million in the year ago quarter. We generated strong organic growth of 20% or $35.4 million with incremental contributions of $21.4 million from CDF. Gross profit in the third quarter of 2021 increased 56% to a record $11.3 million compared to $7.2 million in the prior period. Our GP grew to 16.4% of net sales compared to 11.9% as a percentage of adjusted gross billings, the increase was 5.0% versus 4.2%. Again, the increase was driven by organic growth and the addition of $2.4 million from our CDF acquisition. SG&A expenses in the third quarter were $8.1 million compared to $6.4 million, with the increase primarily related to the incremental costs from the operations of CDF as well as costs related to investments in our business that we expect will drive continued growth in the quarters and years ahead. SG&A expense as a percentage of adjusted gross billings decreased to 3.6% during the third quarter compared to 3.8% in Q3 of 2020. Net income in the third quarter of 2021 increased more than 4x to $2.4 million or $0.55 per diluted share compared to $0.5 million or $0.13 per diluted share.…

[Operator Instructions] Our first question or comment comes from the line of Ed Woo from Ascendiant Capital.

My question is on the outlook for 2022 as we're heading into the end of the year. How do your enterprise customers feel about our business next year?

We don't give guidance, as you know. But as far as just the actual underlying feeling, I think I said it before, it's pretty optimistic. When we thought that projects were canceled during the whole COVID times, they actually just got pushed back, and we're seeing some of those come in and we experienced that in the third quarter. And we just feel like we have a lot of that business building up as well. As I mentioned before, the vendors, same optimism. They're out there hiring as fast as they can to build up their sales team. So I don't see a downside going into 2022 as we're focused right in this quarter already with 1 month behind us.

Have you seen sales cycles return back to normal? Or are they still a little bit extended?

It depends on the product mix, right? So if we're dealing with anything that's a hardware, we all hear about the supply chain issues. If it's going to the data center, something is going to take longer that's coming from overseas, yes, we see those pushed out. We see it in a couple of our solutions business that we're waiting and it's going to be something that we're playing out for Q4 is coming into Q1 of 2022. But other than that, 90% of our business is software delivery licensing. So we don't see any disruption there.

And my last question is, is there any real differences between the business environment in Europe and North America or are they both pretty strong?

Yes, the same thing that I think the energy is ahead of us in Europe, at least in our -- 80% of our business in Europe is in the U.K. and being there for a week. I just feel like they're ahead of us as far as -- not want to say recovery, but just opening up in certain areas like we have the coast here that are kind of tight over there, that's just wide open. Everybody has been traveling, they've opened up the EU between all the countries there. So I think maybe just like the pandemic when it hit, they were ahead of us as far as what we see is what they already went through. So we're on the opposite side.

Our next question or comment comes from the line of [Bob Sales] from LMK Capital Management.

Congrats on the quarter. Can you expand a little bit on the marketplace offering you have? And maybe just sort of 2 facets like no more about is, 1 is how do you see this positioning relative to the other players that are exclusively focused on it? And two, maybe guide our expectations in terms of what you hope to achieve in fiscal '22 as a percentage of revenue or some other metric that we could just understand?

So looking at it two different ways. We have competitors that are traditional distribution that are getting into the cloud delivery system basically. And then you have ones that are born in the cloud like a Pax8 or Avant that already have that cloud offering that they started with. So there's the 2 sides of it. We fit in with the traditional distribution that we're going into a delivery model of subscription based, whether it's monthly, quarterly, yearly on that side. So what we're seeing is that it's -- we haven't parsed between the 2 because it's the way our vendors want to go to market or basically their capabilities are going to market. So right now, if they're doing perpetual licenses, they all want to switch to some type of a cloud-based delivery subscription, whether that subscription is monthly or it's a consumption based. So you'll see our business internally, we'll see it shift from 1 to the other. And then, of course, we hope to grow in both of those places. But we're not going to see just this huge cloud piece take off without some of the slowdown in the perpetual side. So it's just the way that they're going to go to market, and we just want to make sure we're ready for that. We thought we were way behind. We realized that it's really our vendors that are the ones that we're waiting for. So our first entry in is our cloud marketplace called Expedition. We're pushing that every day. We are growing quickly with companies like Wasabi that is also a consumption based. And once we get our 2 platforms sit together, it just becomes more efficient that way. But it's hard to really monetize it right now because it's just early into the stage of it, and our vendors are early into them being able to deliver through a platform.

The second question I actually have 2 more questions. I don't think there's going to be a kind of traffic question-wise. So I'll shoot in both if that's okay. Did you see any signs -- there have been clear signs in sort of the broader IT space of a spending slowdown? Can you talk a little bit about whether or not you saw any of that trickle through the leading edge stuff, maybe whether it was a little lighter to the upside than you hoped for in the quarter? Anything I can just give us a sense of the impact on the leading-edge business that you serve within the context of the slowing broader market?

So we don't -- we track the broader markets because it does have some trends to us. But if you look at the vendors that we actually service and sell the -- we talk about it all the time, they're emerging. So they're just coming out of the startup phase. It depends on where they own their life cycle as far as where they're spending, right? What's their next tranche of money they got, what series it is and they're expanding that way. So we don't. And if you look at emerging vendors, when the market is growing at 4%, 5% in just overall IT software hardware, we should be in the high single digits to low double digits, as far as the growth goes, because it's something new that might be trying to go against a Cisco or one of the big Tier 1s. So we just don't see that as much. We track the data and we see some of the trends, but it's really our focus on is the vendor we picked up disruptive, how disruptive are they and where are they in that life cycle? So it's kind of hard to predict. But if you look at our top 2 vendors, Sophos and SolarWinds, they kind of give some key indicators as their growth, and we talk about those in the releases, but they both -- SolarWinds has been recovering and Sophos is with a lot of the new product mix and their commitment to the channel has been great. So we take that when we can get them.

And then the last question, I guess, for me is when you think about sort of the next acquisition desire, your last 1 what took you overseas where you got a toehold in Europe. When you look at what is in your mind or what will motivate you in the next acquisition or 2? What can you share your thinking with us?

So the thinking is and we have a strategic plan that we follow and I talked about it as far as is it geography? Is it a vendor similar to when we acquired Interwork and we got the Trend Micro relationship. So we look at like probably 4 factors as far as it's a good target. The other 1 is services. Can we add more technical services and start to do that swing in the company? It will be tough to move the needle, but the gross profit margins in services, as everybody has talked about for 10 years, are much higher. So we're looking at that space as well. So yes, there's still some targets in the U.S., not specifically a perfect fit for us in distribution, but more on the service and solutions side that we're talking to. And then the other thing is we're bringing solutions capabilities from the U.K. into the U.S. So you'll see more and more announcements to that probably in the next -- we're announcing in Q1 some more cloud marketplace on the solutions side. But we've signed multiple NDAs talking to companies some good targets, and it's got to be a cultural fit with our management team and their management team and then, of course, to the greater sales and marketing teams.

[Operator Instructions] Our next question or comment comes from the line of [Howard Root].

And really building on the success in the first 2 quarters of the year, it just outstanding progress. I have 2 questions. One on the subscription model and the kind of the shift or the growth in the cloud-based distribution and subscription. Is there -- how does that change, if at all, your financial model? And as I'm looking at, in particular, I'm looking at from adjusted gross billings getting about a 5% gross margin and then SG&A be seeing somewhere around 3.5%. The SG&A being more of a fixed expense going up incrementally with growth based on acquisitions, the 5% gross margin being just basically off of the adjusted gross billings line. And do you see that changing when you go more subscription or cloud based? Or is that going to be more a continuation of what you have now?

Yes, you're right on target, Howard, and that is the efficiency model of doing a cloud where MSP or a hybrid bar can actually log in, manage their subscriptions. It doesn't involve as much heavy lift on our side. So of course, we want to move in that direction because just our SG&A costs will go down as we deliver those. We're waiting, like I said, on the vendors, I'll pick 2 vendors, and then I talk about Wasabi. Wasabi consumption base were the leading distributors they have in the world right now and the numbers aren't very -- they're not off the charts but it's ARR. So it's recurring revenue that won't stop. And when that happens, and then the numbers are smaller per month per consumption, there's more margin to be had there. And we're noticing that, of course, we want it to be a bigger part of our business, which will keep driving that. And then if you look at a company like Sophos, which is subscription based, and then it also has firewalls, it has some hardware to go with it. The goal is, and Sophos has done a good job is they'll ship the firewalls and then all the subscriptions that they'll need to add capabilities to the firewalls will all be a cloud-based platform where they download and it's just going to be a download and your billing. So it's really important for us to get the efficiency side that we do not have touches when customers want to transact that way. And yes, are we there? I would say we're less than 10% overall into that space right now. And this time next year, I'd say the number is probably 30% that we'll be delivering that way, and that's really dependent on how fast our vendors can get there.

My second question is on acquisitions, and thanks for laying out the overall strategy that you have. And congrats on Interwork and CDF, I mean those have been wonderful acquisitions and from a financial side or from an investor side, seamlessly integrated. I know there's always issues, but it's just hit on all marks. But the 1 thing I'd like you to comment on is your financial parameters as you make these acquisitions, and that's in the sense of cash versus stock and then financial metrics, how do you measure the accretion of a potential acquisition into Wayside?

Howard, I think from our perspective, clearly, there's industry standard financial metrics that we'll be measuring and valuing a business around the adjusted EBITDA that it contributes. We also need to factor in, as Dale referenced, what type of increased product opportunities do we have with vendors that we may not have access to and then also factoring a little bit of which we are just starting to be honest, scratched the surface with CDF. There's cross-sell opportunities across the globe where we can get global contracts in place instead of just say, a North American contract with a particular vendor. So we'll value the transactions based on traditional multiples off of metrics such as adjusted EBITDA. We will look at some premium aspects of the business that may justify an increase in valuation. If the transactions are of the size such as CDF or Interwork, we have plenty of liquidity and working capital on our balance sheet to consummate those transactions. We will consider adding leverage because the balance sheet is leverage free today. and the cost of funds are relatively inexpensive, historically speaking. So most likely, we -- for a larger transaction, we would look to a combination of perhaps some cash, some debt financing in terms of the term piece and perhaps some equity as well. But again, those are really to be determined.

And Howard, just to be real transparent, when we're looking at acquisitions, we think that, especially in the emerging space where we play the most is that a lot of the emerging companies want to get successful in the U.S. and then grow to the greater rest of the world. And this is kind of true that with a lot of the targets that I've met with that were overseas, same thing. They have problems acquiring quickly new vendors. It takes a while. The U.S. -- everybody spends their dollars there. It typically becomes 60% to 70% of the overall world market and then they grow into Western Europe or Asia PAC. So we think we're good at onboarding new vendors and then moving them to Western Europe. So that's really our focus. We think that we could move it much quicker than a 6- or 18-month cycle for a vendor to get to our U.K. team. We can ensure in that cycle with systems and just our sales and marketing teams down doing a quarter to deliver that product ahead of our competitors that it's going to take them a while to onboard in the regions.

And just from an investor standpoint, obviously, the stock thing is what concerns me if the acquisitions in that way that the cash, the debt, you've done a wonderful job with that, but as soon as you start doing stock acquisitions, it raises the financial issues. So congrats again on a great quarter.

I'm showing no additional questions in the queue at this time. I'd like to turn the call back over to management for any closing remarks.

Thanks, operator. Thanks to our employee base. A lot of things were moving over this last year between everybody getting back into the offices, people back on travel and everybody has been super supportive to our vendors and to our customers, just overall team effort. So I appreciate it. Thanks for joining the call today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.