Climb Global Solutions, Inc.
Q3 2021 Earnings Call Transcript

Published: 6 Nov 2021

[Operator:]

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

[Sean Mansouri:]

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.

[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 both teams sharing innovations, vendors, systems and our cloud marketplace offerings. One of the key vendors CDF has is Microsoft with agreements to sell both direct and indirect. Our Microsoft [CSG] business is up 26% in Q3 of 2021 versus Q3 in 2020. As for prospective M&A targets, we are in active discussions with multiple parties as we evaluate opportunities in the U.S. and abroad. As a reminder, we are focusing on targeting companies that will be accretive to earnings and fit our strategic direction. The potential targets will fit into 1 or more of our defined categories, geographic reach, vendor perspective, for service and solutions. We have ample room on our balance sheet and debt capacity to execute both tuck-ins and acquisitions of size. The distribution landscape over the last quarter has seen additional consolidation with mergers and acquisitions being completed by Ingram Micro by Platinum Partners and Tech Data by Synnex. This leaves just 3 major broadline distributors worldwide, including Arrow as a third with combined revenues of over $130 billion. We think that this will have a positive impact on our business as these large competitors will be focused internally on integrating their corporate teams and systems with potential disruptions to their vendors and customer base. Large more established vendors are looking to have more and 1 distribution relationship, which provides us with more targets and fits into our value-added distribution go-to-market plays. During the third quarter, we unveiled our new Climb Expedition Cloud Marketplace. As we briefly discussed in August, our new cloud marketplace is designed for MSPs and hybrid VARs to explore and transact with vendors that are moving into a subscription-based model of software delivery. The initial launch of the Expedition Marketplace has received excellent feedback and more of our vendors have reached out to be part of it. With 7 vendors launched to date, 14 are in the pipeline at different stages, preparing to make their debut. As we look towards the future, our commitment remains focused on building a marketplace that highlights emerging technologies, while enabling our partners to transact however they would like to transact. With so many customers and vendors moving from perpetual licensing to structure to a subscription-based model, the cloud marketplace is -- will play a key role in the future of Climb's distribution strategy. Overall, our partners continue to recognize our unique ability to actively sell and market their products to channel customers. Spending on security, data center and cloud product lines are at all-time highs, and we plan to continue capitalizing on this market momentum by providing a streamlined and effective sales channel for our partners. With that, I will turn the call over to Drew to take you through the financial results. Drew?

[Drew Clark:]

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. Adjusted EBITDA in the third quarter increased 128% to $4.2 million compared to $1.9 million. This increase was driven by operating leverage and the aforementioned organic growth and acquisition benefits. Effective margin, defined as adjusted EBITDA as a percentage of gross profit, increased significantly to 37.4% in the third quarter of 2021 compared to 25.6% in the prior year quarter. This is a great indication of our ability to leverage our core operations and to successfully integrate our acquisitions. On to the balance sheet. Cash and cash equivalents were $29.9 million as of September 30, 2021, compared to $29.3 million as of year-end December 31, 2020. We remain debt-free with no borrowings outstanding under either our USD 20 million or GBP 8 million U.K. credit facilities with Citi Group. On November 2, our Board of Directors declared a quarterly dividend of $0.17 per share of common stock payable on November 19 to shareholders of record on November 15. Looking to the end of 2021 and into next year, our strong liquidity position and operating cash flow continues to provide us with the flexibility to execute on both our organic and acquisition growth strategies. This concludes our prepared remarks. We'll now open it up for questions.

[Operator:]

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

[Operator:]

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

[Operator:]

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

[Operator:]

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.

[Dale Foster:]

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.

[Operator:]

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