Good morning, everyone, and thank you for participating in today's conference call to discuss Climb Global Solutions' financial results for the Second Quarter Ended June 30, 2023. Joining us today are Climb'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 second quarter 2023 earnings press release, which was issued yesterday afternoon at approximately 4:05 p.m. Eastern Time. The release is available in the Investor Relations section of Climb Global Solutions website at www.climbglobalsolutions.com. This call will also be available for webcast replay on the company's website. Following management's remarks, we will open the call for your questions. I'd now like to turn the call over to Mr. Mansouri for introductory comments.

Thank you, Carmen. 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, adjusted EBITDA, adjusted net income to EPS and effective margin 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 Climb's CEO, Dale Foster.

Thank you, Sean, and good morning, everyone. During the quarter, we continued to execute on our core initiatives to generate growth within our existing vendor base while adding new innovative vendors to our line card. This led to another period of double-digit growth to the top line in our ninth consecutive quarter of profitability improvement. In addition, throughout the quarter, we made strategic investments in our operating systems, new personnel, sales territory expansion and training and development programs to reinforce our foundation. With a clean and efficient infrastructure and continuous focus on strengthening our line card, we are well positioned to continue our plans to grow -- for growth and profitability as we scale our global footprint. We are committed to a focused line card, which enables us to partner with the most strategic and cutting-edge technology vendors in the market. Out of the 38 brands we evaluated through the second quarter, we signed agreements with only four of them. Quickly touching on a few of our latest wins. First, we partnered with Jamf, a publicly traded company that provides end-to-end systems management and security solutions for an Apple-first environment that is enterprise secure, consumer simple and protects personal privacy. Next, we finalized our agreement with Offensive Security, a leading provider of professional workforce development training for cybersecurity. Offensive Security will be a viable cross-sell within our security offerings, which is one of our fastest-growing segments of our business. And finally, we signed GitLab to our line card, the most comprehensive AI-powered DevSecOps platform in the world. We look forward to building a prosperous relationship with each of these vendors as we take their products to market. In addition to our vendor wins in April, we entered into a strategic partnership with another distributor called Radius. This unique partnership enabled…

Thank you, Dale, and good morning, everyone. As we review our second quarter financial results, I would like to remind everyone that all comparisons and variance commentary refer to the prior year quarter unless otherwise specified. While we had another strong quarter, it was not quite as boring as the previous eight. So let's jump in. As reported in our earnings press release, adjusted gross billings or AGB, which is a non-GAAP measure, increased 14% to $274.7 million compared to $241.8 million in the year ago quarter. In addition, net sales in the second quarter of 2023 increased 20% to $81.7 million compared to $67.9 million, which primarily reflects organic growth from new and existing vendors. As we have communicated before, we focus on AGB as the true metric of our growth as the calculation of net sales is influenced by product mix and the respective adjustment to convert AGB to net sales for financial reporting purposes under GAAP. In the second quarter, we had an increase in sales of products such as Tintri that included hardware and therefore, a lower adjustment from a TGB-2 net sales. Gross profit in the second quarter increased 10% to $13.7 million compared to $12.5 million. Again, the increase was primarily driven by organic growth from new vendors as well as our existing top 20 vendors in North America and Europe. This growth was partially offset by customers taking advantage of early pay discounts at a greater level than in the prior year. Gross profit as a percentage of adjusted gross billings was 5% compared to 5.2% and as a percentage of net sales was 16.8% compared to 18.4% in the prior year quarter. Both of those impacted by the early pay discounts taken by the customers in 2023 compared to 2022. SG&A expenses…

[Operator Instructions] Our first question is from Vincent Colicchio with Barrington Research. Please proceed.

Yes. Good morning, guys. Dale, curious, are you seeing any changes in the demand backdrop from last quarter to the current period? In particular, you're seeing any pushback on pricing or any changes in sales cycles?

You're talking about from Q1 to Q2?

I'm sorry?

Yes, from Q1 to Q2. So we haven't really seen that. We've seen some of our competitors that are more hardware-centric or centered that they've seen a little slowdown as people have stopped buying a lot of hardware, but we haven't really seen that. We haven't seen it from our vendors. We have seen some consolidation of vendors not going with as many distributors. So they're trimming that. And we've been fortunate enough to make it through those because they're looking at a broad line and then something that's much more strategic and that we typically fit that. And there's not a lot of competition on the strategic side. So I haven't seen really a pullback.

And are you seeing strength in the same technology segments as the prior quarter? Any changes there?

We are. I mean we're seeing a little slowdown in the data center side, but we are heavy security, if you look at our -- we put it out in a lot of our marketing, we have six segments we focus on, security being one of the biggest ones. A lot of our vendors are all claiming security. And now we're starting to see the, of course, the AI terms propagate into much of their marketing slicks and what they're promoting, but haven't. And we're continually looking for adjacent markets that are outside of our normal six categories to say, hey, is this something we should really start diving into and we've got some that we'll probably announce in Q3, Q4.

And did the growth of the top 20 vendors grow in line with the business? Any exceptions there?

It was very consistent in terms of the vendor mix in our top 20. We've got some new emerging vendors that are starting to chip away at the top 20. We expect that, that will -- that mix of top 20 will shift slightly as we get to the end of the year and move into 2024.

Vince, if you look at some of the vendors, if you look at some of the sizes, we -- a lot of times, you'll see a vendor that they raised $20 million, $30 million. They have much in revenue. But now we have a couple of vendors we've signed. They're in the $300 million, $400 million range. And they're really accepting distribution as their go-to market. If you've seen a lot of the technology companies, just being a little cautious with the economy, so they're trimming and they're just putting more leverage or expecting more from the channel, which is a good thing for us.

And lastly, on the acquisition side, have valuations continued to improve? And if so, does that make you more -- feel better about getting something done here in the near term?

Yes. If you look at some of the targets, it varies because if it's overseas, the margins are typically higher, so the multiples are typically -- they're looking for a higher multiple. I think some of those have softened a little bit, not drastic. I haven't seen a big change in that.

Okay. I’ll go back in the queue. Thanks guys.

Next question comes from the line of Howard Root. Please proceed.

Good morning, Dale and Drew, can you hear me okay?

We sure can.

Sure. So nice job on the quarter, continued nice progress. I got three questions, if you won't mind, this morning. One more for Drew on the SG&A. So the jump up year-over-year was about $3.7 million, and I understand that the $1.8 million was that onetime stock grant which, hopefully, the Board doesn't do that again. They level load that going forward, so we don't have that issue. But that -- but then there was $400,000, I think you said, Drew, which was these onetime professional service fees that you mentioned in the press release. So that's $2.2 million, but then there's about another $1.5 million year-over-year. But then if I'm looking sequentially, it just went up from $10.3 million to $11.6 million, which is a $1.3 million increase, which isn't even the amount of the stock grant and certainly not that included. So can you give me a little hint? You level loaded that, what do you expect maybe Q3 or level loaded in Q2? What's the appropriate number of SG&A as we're looking forward on a dollar amount?

Yes. On a dollar amount, so part of that delta between the prior year Q and this Q was a variable component, commissions. So if you looked at AGB compared to quarter-over-quarter, commissions were commensurately increased. So we had, again, a variable comp expense, but probably about $500,000 plus in incremental commission expense associated with Q3 -- excuse me, Q2 of 2023. And then we had some payroll-related expense associated with Dale's grant that obviously is not -- will not reoccur in the prior -- the subsequent quarter, that was about $150,000 give or take. So I think on a level-set basis, you'll see us pull back to a level that's going to be probably closer to $10 million, $10.2 million.

Okay. Great. Yes. So if you take the $2.2 million off of the $11.6 million, that's what the SG&A would have been for that level of adjusted gross billings.

Howard, I want to add to that, though. So we're going to be opportunistic. And sometimes we -- I think of the whole Field of Dreams, if you build it, they will come. Sometimes we have to build into what the vendors are asking if they want us to take over the renewals platform, we have to move -- start investing in our team members to do that. And we've done a separate renewals team, and we've had to add to that. So we'll be opportunistic as they're starting to push more things off of their plate and into the channel. Of course, we get paid for that, but usually, it's a little lagging. So we are going to be and do that. So I don't want to say that that's going to be perfect, but in certain quarters, we have two vendors come in and say, "Hey, we want you to do this, this and this, and we want you to run our incumbency program that we don't want to run, and we don't want to have it at another one of your competitors." So it's going to be -- there's some ebbs and flows, but not at the level of last quarter.

Yes. And Howard, even though we don't provide granular guidance or detailed guidance on a quarterly basis, I can tell you that from an internal perspective, our operating expense was spot on with our internal expectations. And part of that is increased headcount, right? We acquired Spinnakar last year. We brought on some additional headcount that was not reflected in Q2 of 2022. So of, I think, 10-plus Spinnakar employees, I think 7 or 8 of those folks remain with us, including, obviously, Gerard is the Chief Revenue Officer over in EMEA now and still running some significant vendor opportunities there. So we do have some built-in headcount increases that we expected and planned for. So that's part of the year-over-year change in SG&A as well.

Okay. Fair enough. Second question on adjusted gross billings. I mean, a nice increase year-over-year, up $33 million or 14%. But if I look from quarter one to quarter two, it's down $32 million, not -- sequentially, that wasn't the quarter. I would expect Q4 down, Q1 maybe. But is there a sequential aspect of that? Or what sequentially on that drop in adjusted gross billings, what were you seeing there? And what do you expect kind of going forward?

Yes, Howard, so again, we were on target with our own internal expectations. What happened in Q1 was a significant, vast transaction that landed in Q1 that we didn't expect. Q2 Spinnakar didn't quite perform at the same level. Vast opportunities got pushed out because of some data center delays over in Western Europe. Data center builds, both new construction and expansion slowed down due to the economic headwinds over Western Europe. Interest rates, obviously, grows. So a lot of the data center owner-operators slowed down some of their process, which, therefore, slowed down some of the vast opportunities that we have with Spinnakar. Nothing's gone off the pipeline. They've just moved out into future quarters. And as we indicated previously, when we acquired Spinnakar and have made the comments each quarter, there is going to be some cyclicality or lumpiness to the Spinnakar acquisition. We're going to have some really strong quarters. We're going to have some ebbs and flows and some dips just because longer sales cycles for some of the vendor products like Deep Instinct and Vast, but they're much larger in size and much higher margins. So we believe that once we get into probably a normalized run rate into 2024 and beyond with some of those vendors, Vast, like as data center-related vendors that will get more consistency quarter-after-quarter, but there's going to be a little bit of lumpiness/roller-coaster over the next several quarters.

Okay. And then my last question kind of related there is on forward guidance. I know you don't give it, but at what point will you start at least giving next quarter guidance or some long-term targets? It's kind of the same question every call, it's like what do you see? Where are you in this market? Where are you in the revenue ramp? Is this linear? Is this just starting? Is this starting to meet acquisitions to keep the growth going? It'd be just helpful to kind of get your take on it in this call and then going forward to get more guidance or at least long-term targets for you so we can kind of judge where this company is headed. So what can you say kind of where you are right now and some of the [multiple speakers].

I think the best thing -- we just won't give detailed guidance. We're not at that stage right now that we feel comfortable with that. But I can tell you, we can just talk about the industry in general and what we actually see. And I think that anybody that holds for a while has noticed the consolidation in the North American market has happened in distribution as far as acquisitions. In the European market, that is our target, and that is really our greenfield that we're going to be going after. So that we see a lot of targets over there. So that's on the acquisition front. There's plenty of targets. It's almost as many targets that I talked about as our CMO Charles Bass talks about with emerging vendors. But I still think you need to look at us from the vendors we signed. And if you look at some of the names, of course, unless you're super deep into the technology field, you don't -- you never heard of some of these names. But if you go to Crunchbase, or you'll actually look into them and into what they're actually doing and how they're growing. We believe we should grow and continue to grow organically in that 10% to 15% range because that's what emerging vendors grow at. They don't grow at GDP where an established vendor grows at unless they're acquiring companies. So that's -- our broadline competitors are growing in that 4% -- 3% to 4% GDP range or not growing at all. So that's what we focus as an internal team. That's what we see, and that's what we're going to continually trying to drive to is that emerging vendor. As we get more established vendors, yes, we'll see some slowdown because they become a larger piece of it. The margins condense a little bit, and they don't grow fast, but we still consider some of our top vendors as emerging because they're still sub-$1 billion companies.

Okay. Fair enough, every quarter, just the more you give guidance and perspective and whatever you can do, especially into next year, the more helpful it is for us to see what's going on and where we're headed. But nice quarter again, great job, continue good work and hope things continue.

We have Vincent Colicchio with the follow-up from Barrington Research. Please proceed.

Yes, Dale, you just cited that 10% to 15% growth number for the type of client you work with. Would you say that's sort of the level they're on target for this year, best you can tell?

Yes, I mean, that's what we look at individual vendors that we do. I'm not -- I don't want to be held to the overall global piece of it. But if you look at our vendor mix, that is where we're trying to grow at. And there are some things that come at us like I said, we're opportunistic on some of our expenses when we have to build things for a quarter and saying, hey, we have to have this team. But yes, that's our goal. Let's put it that way.

And Vincent, I would have stated this earlier as well, and I understand the market's need and investors' need for perhaps a little more guidance along the way. But we're in this for the long game. We're not focused on quarter-to-quarter. As Dale said, we're going to be opportunistic both in our organic growth and organic investments as well as our acquisition opportunities, which that pipeline is fairly robust. But I would say that we're comfortable that our adjusted gross billings will continue to have a low double-digit growth. Quarter-to-quarter may be different, but overall, over the next several years, we're very confident that we'll grow this business at the same rate as our vendor population grows.

Okay. And then Dale, one last one. Should we continue to expect you to add approximately 3 vendors each quarter? Is that sort of the game plan?

Not really. It's what we actually see and when they're ready to go. Some of them, of course, we want a lot or more excited about signing them as they are signing on or they're going and setting up there for their channel structure. But yes, I mean, sometimes it's going to be a couple, sometimes it might be five. We're trying to trim but we still continue to trend. We talk about who we add. We really don't talk about what we trim. So we push a lot of vendors over to Climb Elevate, which is now over 500 vendors that they actually transact, but it takes it out of the core client business, so it doesn't get marketing dollars spent on it. It doesn't get any real focus. So there's nothing there other than that be transactional and the systems connection to our customers. So we'll continue to do that. We've also launched Climb Elevate over in the U.K. So they're doing the same thing over there. We'll get more efficient. And then with our ERP coming online, we'll all be talking the exact same language and it will make it a little easier for us across the pond.

Thank you all for your questions. I will pass it back to Dale Foster for final remarks.

Thank you, operator. Thank you to the shareholders, and thank you to the Climb team globally. We're going to continue to deliver on our core initiatives as a company, and we look forward to talking to you next quarter.

Thank you. And this does conclude the conference. You may all disconnect. Thank you.