Climb Global Solutions, Inc. (CLMB) Q4 2021 Earnings Report, Transcript and Summary

Good morning, everyone, and thank you for participating in today's conference call to discuss Wayside Technology Group's financial results for the fourth quarter and full year ended December 31, 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 fourth quarter and full year 2021 earnings press release, which was issued yesterday afternoon approximately at 4:05 p.m. Eastern Standard Time. The release is available in the Investor Relations section of Wayside Technology Group's website at waysidetechnology.com. This call will also be available for webcast replay on the company's website. Following management's remarks, we'll open the call for questions. I'd now like to turn the call over to Mr. Mansouri for introductory remarks.

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 our 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 measure 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. 2021 was a record year for Wayside as we generated record financial results across all of our key financial metrics, including adjusted gross billings, net sales, gross profit, EPS and adjusted EBITDA. The same applies to our fourth quarter results as we closed out the year on a very strong note. As we introduced last year, our growth initiatives fall into 3 buckets: driving organic growth with existing vendors and customers, adding new emerging vendors to our line card and delivering on our acquisition objectives. In our existing vendor network, we continue to execute on deepening our partnerships and increasing wallet share. In 2021, we generated $588 million of adjusted gross billings in North America with our top 20 vendors compared to $471 million in the year prior, a 25% increase. This reflects both the value we are offering to our partners and customers as well as our ability to evaluate and partner with the right emerging technology companies that are driving growth and bringing value-added products to market. As we have often stated in the past, we evaluate hundreds of emerging vendors each year, and we are very thoughtful in our approach, selecting the right partners to add to our line card. For perspective, during the fourth quarter alone, we evaluated nearly 40 vendors and only signed 4, including [Atlassian], Sonatype, Vultr and IRONSCALES. IRONSCALES is the fastest-growing emerging security solution in the world, Sonatype is a developer-friendly, full-spectrum software supply chain management platform and Vultr is an incredibly reliable cloud platform that offers a simple, modern infrastructure. We look forward to providing a new sales channel for these companies and offering their products to thousands of valued resellers in our network. Turning to our acquisition objectives. Q4 marked the 1-year anniversary of our CDF acquisition that was really our first acquisition of size and our first test as a team in terms of integration. Overall, CDF has been an excellent addition to our organization. In 2021, their business grew 17%, accounted for $10 million of our total gross profit and 25% of our overall growth in GP. The transaction has been accretive to our gross profit margin, and we are still just scratching the surface in terms of cross-selling our vendor networks and leveraging cost synergies, which are 2 areas that we will improve upon as we move forward. In 2022, we expect to better leverage our vendor networks to drive growth between the regions, and we also plan to integrate both CDF and Wayside back-offices under a uniform ERP platform, which will lead to an additional cost synergies down the road. As for potential M&A targets, we are continuing to evaluate opportunities both in the U.S. and abroad. As a reminder, we are focused on targeting companies that will be accretive to earnings and fit our strategic direction. The potential targets will fit into one of our defined categories: geographical reach, vendor perspective and servicing solutions. We have ample room on our balance sheet and financing capacity to execute both tuck-ins and acquisitions of size. Looking at the year ahead, 2022 is already off to a great start. In January, we became an approved vendor for the NCPA contract, which is a leading national government purchasing cooperative. There are over 90,000 agencies nationwide from both the public and nonprofit sectors that are eligible to utilize this cooperative purchasing contracts, and this partnership will allow us to leverage their extensive agency network to deliver best-in-class security and IT solutions across the government, health care and education sectors. In less than a month, as an approved vendor, we signed our first NCPA contract with Datadobi. So I believe we have a great opportunity ahead of us. Also, I want to touch on a key addition to the Wayside team. In February, our Board of Directors elected Greg Scorziello to join the Board as the seventh director, 6 of them are independent. Greg brings over 30 years of experience creating and building global operations for early and mid-stage companies. Throughout his career, Greg has several international leadership and management roles with companies like Immuta, Activio and IBM. He currently serves as a Board member, strategic adviser and investor in multiple technology companies as well. We plan to leverage his extensive knowledge in the European technology market to continue building our business overseas and we are thrilled to have him on our Board. Before passing it to Drew, I would like to take a moment to recognize the continued turmoil that is escalating in Ukraine. We have very little business activity involving customers or vendors in Russia, and we have already placed a hold on transacting business with those companies. Our thoughts go out to the family members that are affected by this troubling turn of events. With that, I will turn the call over to Drew, and he will take you through our financial results. Drew?

Thank you, Dale, and good morning, everyone. As Dale just noted, we're excited to have Greg join our Board and look forward to working with him and the entire board as we continue to grow Wayside through our organic growth and acquisition strategies. As we review our operating results, I want to remind everyone that all the comparisons and variance commentary refer to the prior year quarter unless otherwise specified. As reported in our earnings press release, adjusted gross billings, a non-GAAP measure, increased 16% to $262.1 million compared to $226.4 million in the year ago quarter. We generated strong organic growth of 12% or $25.1 million, with incremental contributions of $10.6 million from CDF. Net sales in the fourth quarter of 2021 increased 6% to $75.5 million compared to $71.4 million. This reflects both continued organic growth and the benefit from the acquisition of CDF. Excluding the acquisition, we increased net sales by $2.8 million year-over-year, with CDF contributing an estimated $1.3 million. As we've noted before, the ASC 606 adjustment to calculate net sales from adjusted gross billings is impacted by our vendor and product mix. CDF has a larger portion of vendors, including the Microsoft CSP Solution for which our role as agent represents a higher component of the economic transaction. In addition, several of our more recent vendors and those with higher growth rates have a larger portion of the billing related to maintenance and support, which is ultimately provided by the vendor and thus not recognized in net sales. Gross profit in the fourth quarter of 2021 increased 20% to a record $12.6 million compared to $10.5 million. Our GP as a percentage of adjusted gross billings increased to 4.8% versus 4.6%, which represented 16.7% of net sales compared to 14.7% in the prior quarter. Again, the increase was driven by organic growth and the addition of $1.2 million from our CDF acquisition. SG&A expenses in the fourth quarter were $8.2 million compared to $7.7 million. SG&A as a percentage of adjusted gross billings declined to 3.1% during the fourth quarter compared to 3.4% in Q4 2020. This trend reinforces Dale's comments on our ability to leverage and scale our investments in the business, including the integration of our acquisitions. Another record for the company was net income generated in the fourth quarter of 2021, which increased 36% to $3.4 million or $0.78 per diluted share compared to $2.5 million or $0.58 per diluted share in the prior year quarter. Adjusted EBITDA in the fourth quarter increased 17% to $5.1 million compared to $4.4 million. The increase was driven by the organic growth, improved operating leverage and CDF acquisition benefits. Effective margin, defined as adjusted EBITDA as a percentage of gross profit, was 40.7% in the fourth quarter of 2021 compared to 41.4% in the year ago quarter. However, I would like to point out the quarterly trend in 2021 continued to improve as we increased our effective margin from 37.4% in Q3 and 32.0% in Q2. This is an excellent barometer of our ability to grow and deliver an increasing amount of the incremental GP to earnings. With regard to our balance sheet, cash and cash equivalents held flat at $29.3 million as of December 31, 2021 compared to the same period in the prior year. While working capital increased by $8.6 million during this period, we continue to remain debt free with no outstanding borrowings under either our USD 20 million or GBP 8 million credit facilities. As Dale previously noted, we are actively pursuing M&A opportunities and our cash position, working capital and leverage free balance sheet puts us in a position of strength as we move forward. On March 1, our Board of Directors declared a quarterly dividend of $0.17 per share of common stock. The dividend is payable on March 18 to shareholders of record as of March 14. As we look ahead into 2022, our strong liquidity position continues to provide us with the flexibility to execute on both our organic and inorganic growth strategies, as I just noted a moment ago in addition to allowing us to expand our relationships with new vendor networks and customers across the globe. This concludes our prepared remarks, and we'll now open it up for questions from those participating in the call. Operator, I'll turn the meeting back over to you. Thank you.

[Operator Instructions] And our first question comes from the line of Howard Roop [ph], he's a private investor.

Congratulations, guys, just a simply outstanding quarter. If you had a stock analyst covering the stock, it'd be due for a rerating and I'm still shocked that there's no analysts covering you yet. But congrats on the quarter. I'll ask 2 quick questions -- 1 quick question, 1 longer question. The quick question more for Drew. Accounts receivable kind of took a big bump up in Q4, up by about $25 million. Can you give me a little explanation what happened? Is that a continuing trend? Or is that just a onetime deal?

Howard, thanks for participating in the question. We had a couple of our larger customers that delayed payment toward year-end. So it's a little bit of a double-edged sword. Obviously, it grows the receivable portfolio, but fully collected post year-end. The benefit though to the company is some of those customers did not take advantage of the early pay discount, which had a positive impact on our gross profit and the margin for Q4. So no indication that there's a trend there, it was just probably a timing of them doing some balance sheet management on their side.

Okay. Great. And then the larger question more for Dale here is, as we've discussed before, I just -- I look at the adjusted gross billing because the division of that to net sales is just an accounting decision. And when I look at that, the sequential jump was impressive. I mean year-over-year and sequential up by about $35 million from $227 million in the third quarter and $262 million in Q4. And then you're keeping the gross profit, which I look at as based on AGP at 4.9% or so, and your SG&A, being relatively flat. Do you see -- is that a -- again, is that a one-off bump up? Or what was that massive spike from Q3 to Q4 in your adjusted gross billings? And do you think that gross profit will stay there at that 4.9%, around 5% of AGP and your SG&A? So if you look at those, is this a new trend for the company going forward? Or is this a onetime bump in Q4?

A couple of things. Let's talk about the gross profit. I mean that's our goal is to be in that 5% range that's out there. And we are always looking, and we talk about it probably too often about jettising some of our lower-margin vendors that are down the line card and replacing with these new emerging ones that we picked, and that's what we talked about adding some more. So we always look at that. We should have a garner, a higher-margin on some of the new ones that we talk about when we're actually engaging with that vendor. As far as the Q3 to Q4, I mean, Q4, a lot of people are extinguishing their budgets. They're getting their renewals all done. So we always see a stronger Q4 than Q3. Once we build out more of our public sector practice, which I'm used to in my past life, as we'll see Q3 start getting stronger as well. Right now, we take advantage of other of our customers' contract vehicles for public sector, but we want to do it on our own with our GSA contract and then as we announced, the NCPA contract. So that's kind of it. It's a good trend. We have -- many of our vendors are recovering, so opposed to -- strong as well. So we're riding that wave with them as they -- people are getting out and buying more and getting their systems set up.

Okay. If I could sneak one last question in. You mentioned acquisitions a little more than you did in prior calls. And just on that, how do you view the use of stock versus cash in making acquisitions?

Yes. We haven't had to use stock right now. If it's transformative, where we think we have to use some of our equity or capital, we would do that. But it's not something we think about right off the back. It really depends on the size and how transformed business to the company. And I think we talk about it because it's on the front of mind for the entire management team. We didn't complete any acquisitions in 2021. We plan on them in 2022. But we've talked to a lot of companies if I could put that way, and we're getting close to some of them going forward to say, hey, if this is going to -- we're going to pull the trigger in 2022.

And our next question comes from the line of Bob Sales with LMK Capital Management.

Great performance. Just one comment and a couple of questions. I would -- this playbook is just -- here's my comment. This playbook is just so fixed for great things on the bottom line for the company and for the stock price. And I would just encourage you to think about this continued additive acquisition playbook versus transformative with heavy stock component which always adds significant risk. It just seems that there is solid runway for what you all are doing, particularly with the new line card adds that will feed into '22. So it's just one investor's view. The second -- the 2 questions I have would be, first, I was hoping can you dive a little deeper. You commented on ASC 606 and you made a comment about CDF, a larger portion of Microsoft rev. And then some of your newer customers have more maintenance. Can you just exploit that a little bit more or explain that a little bit more?

Go ahead, Drew.

Yes, we -- again, as Howard noted, it's really the accounting mechanisms at play right here versus the economics of the transactions. But some of our newer vendors and those with higher growth when we evaluate the full economic component of what we sell, normally, it's a software license, obviously, we do not sell a lot of hardware. So it's 88% plus of our adjusted gross billings and net sales are related to software solutions and applications. So when we go through the process of identifying the components of what is delivered post installation by our resell into the client, it's a mix issue at the end of the day, and some of these new products just have a higher component when we evaluate the economics of the transaction that relate to that ongoing support and/or maintenance from the ultimate vendor. And that's the situation with the CSP products that we'll continue to grow from CDF, and now that we have a full year of activity in there. That's a smaller balance in total, but it's going to continue to have a little bit of a downward pressure on the net sales number. But we target net sales to be sort of in that 30% range of adjusted gross billings. And we don't expect that trend to differ significantly as we move into 2022 and beyond.

Okay. And then with the sort of the major geopolitical events going on, can you -- and I would think the widespread concern on security across corporate and government networks. Can you give us a sense of the landscape in terms of sales opportunities now versus, say, 6 months ago and whether or not you're seeing an incremental interest in new offerings in sales inquiries?

Yes. I'll give you the upside right now as far as lot of security vendors coming out that we're looking at, you can see our portfolio is heavy security and then the second portion is data center. Regarding the downsides on selling, North America makes up the majority of our sales, U.K. is the next biggest piece and then sprinkled out throughout Europe. So that's really where we're selling to. But agreed, we had many vendors in talking about customers and their activity level just coming to them, looking for security solutions. If there's continued cyber tax, where are the actual vulnerable. And we have companies like SecurityScorecard that's exactly what they do. They score you as a company. And then you can look and say, "Hey, where are my holes?" And then you look for the actual technology to plug those holes. So I see opportunity. I don't see it off the charts because of this, but it's definitely up. And I don't know if that's just more of the opening up of the world after the pandemic or something different. I'm not -- I don't have insight to that.

And Dale, would you like to respond to my comment, perhaps with your view of what would intrigue you and tilt the scales towards considering a formative acquisition that might entail a heavier equity component and cost more?

Yes. I mean it would just have to be that size that made sense for us. I mean this is going to be a full management discussion along with our board, saying, "Hey, does this make sense for our shareholders to do that." But right now, a lot of the ones that we've done, we've been able to use our own cash. We still haven't tapped into any kind of debt facility. We would look at those first before we go to the equity piece. And I can't give you a number as far as transformative to do that. It would just be based on what that acquisition looks like.

Yes. Well, you guys have --

Let me -- yes, let me just reiterate Dale's point, which is we have really strong leverage capability on our balance sheet. We are having conversations with our existing lead bank, which is Citi as well as others in the marketplace, about what type of structures we could put in place for acquisition financing. So we've got 2 paths. To be honest, one would be a cash flow term type of facility, which you're going to get the market rate leverage turn. But we also have probably a greater capacity with an ABL facility, utilizing our receivable portfolio combined with the acquisition target. So if we do have that transformative opportunity, most likely, we could use debt for -- and cash on our balance sheet to consummate the transaction. The question would be for us if there was an incentive for the seller that wanted to have some additional upside and there could be a small equity component. But right now, the management team and Board's thought process is that we would look to fund the transaction predominantly with senior and/or mezz type of financing in place.

Yes. Well -- and again, the playbook I see is just the tremendous return on invested capital and operating leverage that floats to EPS accretion, it's just something -- and sort of in the sweet spot of where IT is right now, it's just something you don't see out there very much. So I just think that playbook is just wonderful.

We agree and thanks. And the team will record this for promotional activities in the future.

And I'm showing no further questions at this time. And I would like to hand the conference back over to Dale Foster for any further remarks.

Thank you, operator, and thanks again for everyone that's watching us, the Wayside family. I'd like to give everybody a little insights, what's going on in the company. We had our sales kick-off last week. We had everybody in-person, over 100 people. I think we had over 40 vendor reps in person, so it was great to see everybody. And the energy is there. I think some of it's from getting out of your houses and moving around a little bit more. So just a great energy, setting up plans for 2022. We see just some great growth opportunities that we're going to capitalize on. And I talked to my Wayside family that works every day that we have shareholders, we have employees, customers and vendors, all considered stakeholders. So I appreciate the stakeholders in the company and watching us. And with that, we can finish the call. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.