Climb Global Solutions, Inc.
Q1 2020 Earnings Call Transcript

Published: 12 May 2020

[Operator:]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Wayside Technology Group's Financial Results for the First Quarter ended March 31, 2020. Joining us today are Wayside's CEO; Mr. Dale Foster; the company's CFO Mr. Michael Vesey; and the company's Vice President of Alliances for Lifeboat Distribution, Charles Bass. By now everyone should have access to the first quarter 2020 earnings release which went out this afternoon at approximately 04

[Dale Foster:]

Thank you Phyllis and good afternoon everyone. Before we get into the operational updates I want to acknowledge the challenges that many people in our communities are facing as a result of the COVID-19. I'm especially proud of our team and their dedication to serving our customers during this unprecedented time. Despite the challenging environment, we continue to execute well as the strong momentum we generated throughout last year is carrying into 2020. We drove double-digit growth in gross profit and nearly 40% adjusted EBITDA growth in Q1 to $3.1 million. The sales and marketing investments that we made last year have allowed us to address customer demand amid the current state of home mandates where companies are using many of our technology partner products that will allow them to remote access to their security -- or for the security of their systems and the corporate data centers. Our ability to keep expanding our vendor network and deepen customer relationships even in these current market conditions tells us that we have built a successful and resilient foundation as a sales-driven organization. We spent the second half of March gearing our resources to support the health and safety of our employees. All of our corporate teams are now working remotely. Though our business has not been negatively impacted by COVID-19 to-date, we are continuing to diligently manage our costs and operating structure to mitigate any potential impacts down the road. With these priorities in place, we are proud to be operating at full capacity and strength as we continue our momentum into the second quarter. One of our most significant business updates that I can share with you is the subsequent to Q1 our acquisition of Interwork Technologies which we announced on April 22 of this year and officially closed on the 30th of April. Interwork is a Toronto-based value-added specialty distributor focused on cybersecurity, information management and network solutions in both Canada and the U.S.. Lifeboat and Interwork have very similar cultures built on servicing clients with a differentiated high-touch approach and we will identify multiple near-term costs and revenue synergies between the two organizations in the short term. Charles will discuss some of the benefits that Interwork brings to our vendor network and alliance strategy shortly. For now I'll say that we greatly look forward to getting integrated with Interwork to our Lifeboat Distribution platform to further expand our distribution network. Before I provide more detail on the state of our business and Wayside's post Q1 trajectory, I'd like to pass the call over to Charles to discuss recent technology vendor and marketing highlights. From there Mike will walk us through the financials and we will – and I will come back in for closing remarks. With that, Charles?

[Charles Bass:]

Thanks, Dale. On the topic of the Interwork acquisition Interwork brings more than 20 new vendor partners and a vast network of value-added resellers or VARs. Interwork's current network of VARs presents a great opportunity for us to expand our presence particularly in Canada. The company's deep relationships in Canada and reputation for highly responsive service levels provide us with a lot of leverage as we execute on our own vendor alliance strategy, which focuses on identifying evaluating and onboarding high potential emerging tech partners. Given our limited overlap in customers and technology partners, we expect to actively cross-sell products and services across both organizations. In fact, Acronis one of Lifeboat's and Interwork's only three overlapping vendor partners strongly endorsed the acquisition. They see significant value in the combination and its capacity to grow Acronis' distribution network along with our ability to accelerate their go-to-market for new products. We welcome this enthusiastic feedback from Acronis and we remain committed to delivering value to all of our vendors as we integrate Interwork into the Lifeboat platform. I'd also like to mention that, we see two important future benefits that fit well with our emerging technology strategy. So first, Interwork's business is focused on security and data protection which is Lifeboat's largest product category. They've developed a critical mass of talent and experience here that we will leverage across Lifeboat brands. And second, we've got a very – had very positive interactions with Trend Micro one of interworks larger vendor partners. Lifeboat will fast-track the onboarding of these top vendor brands and commit significant resources to replicating Interwork's success with them. We remain committed to our core strategy of adding new emerging vendors to our line card, while building even deeper relationships with focused resources on our current partners. In our view, the Interwork acquisition is a significant bolster to our strategy rather than an interruption. With that, I'd like to turn the call over to Michael to provide more details on our financial results. Mike?

[Michael Vesey:]

Thanks, Charles, and good afternoon, everyone. Jumping right into our results. Net sales in the first quarter increased 40% to $62.6 million, compared to $44.9 million for the same period in 2019. Just over half of this growth, was attributable to increased adjusted gross billings volume, while the rest was a result of a change in mix in products we record on a gross sales basis. Lifeboat Distribution segment net sales in the first quarter increased 43% to $57.3 million compared to $40.1 million and TechXtend segment net sales increased 11% to $5.3 million compared to $4.8 million. Adjusted gross billings a non-GAAP measure increased 22% in the first quarter to $173.1 million compared to $141.9 million for the same period last year. As we have stated in the past, the most appropriate metric to gauge our growth is gross profit, given unique revenue accounting treatments in our industry. With that said, gross profit in the first quarter increased 13% to $8.2 million compared to $7.2 million for the same period in 2019. The increase was driven by our primary business segment Lifeboat Distribution, which benefited from our continued work to deepen customer relationships and expand our vendor network to drive growth. Total SG&A expenses in the first quarter remained consistent at $5.5 million with the same year ago quarter. As a percentage of revenue, SG&A decreased 350 basis points to 8.8% compared to 12.3% in Q1 2019 demonstrating the scalability of our business as we continue to leverage our investments in field sales and vendor recruitment, which enables our growth without a proportionate increase in SG&A. Net income in the first quarter of 2020 was $800,000 or $0.18 per diluted share compared to $1.5 million or $0.32 per diluted share in the same period in 2019. The decrease was driven by costs related to our settlement with N&W Group, which Dale will highlight shortly as well as costs related to the Interwork acquisition. Adjusted net income in Q1 which excludes these costs – these onetime costs was $2.1 million or $0.48 per share. Adjusted EBITDA in the first quarter increased 38% to $3.1 million compared to $2.3 million for the same period in 2019. The increase in adjusted EBITDA was driven by organic growth with our existing partners and new vendor additions coupled with prudent cost management and operating efficiencies. Effective margin, which is defined as adjusted EBITDA as a percentage of gross profit increased 700 basis points to 38.2% compared to 31.2% in the prior year period, which continues to reflect the strong operating leverage we created for our business. Cash and cash equivalents were $11.6 million at March 31, 2020 compared to $15 million at December 31, 2019 and we remain debt-free with $20 million of availability under our credit facility. The decrease in cash from the end of 2019 is attributable to the timing of receivables. As our customers mitigate the impacts of the pandemic on their business, several of them have communicated with us about flexibility in payment timing and terms regarding receivables. We view our resellers as our partners and we are therefore committed to helping them adjust to these difficult market conditions. Maintaining these open lines of communication and flexibility only strengthens our customer relationships and makes our business that much more resilient in this unprecedented time. We continue to return a significant portion of our earnings to shareholders in the form of a dividend. On May 5, 2020, the Board of Directors declared a quarterly dividend of $0.17 per share of common stock payable May 22, 2020 to shareholders of record on May 18, 2020. Now on to details from our transaction that closed at the end of this month. We view the acquisition of Interwork Technologies as a great opportunity to accelerate growth in both gross profit and adjusted EBITDA. We've acquired Interwork for an aggregate purchase price of CAD 5 million payable at closing plus a potential post-closing CAD 1.1 million earn-out. In U.S. dollars this equates to US$3.6 million of closing plus US$800,000 on the earn-out. We expect the acquisition to add approximately US$1 million in annualized adjusted EBITDA after realizing synergies that will be phased in during the second and third quarter. More importantly, we've put our capital to use effectively, picking up a strategic asset that fits within our operating strategy and provides opportunities for future growth. This concludes my prepared remarks. I'll turn the call back over to Dale.

[Dale Foster:]

Thank you, Mike. Before I get into the plans for the road ahead I'd like to first provide details on the recent actions that we took with the North & Webster group. As mentioned before, on April 16, we've reached a settlement with N&W regarding their proxy solicitation to nominate director candidates for election at our 2020 annual stockholders meeting. This solicitation followed an unsolicited proposal we received from N&W to acquire Wayside in December of last year, which we determined did not serve the best interest of our shareholders, as we further communicated on our Q4 conference call. In the proxy solicitation settlement last month N&W agreed to withdraw the notice of their intent to nominate director candidates and cease any further solicitation activity and we agreed to dismiss our lawsuit against N&W. Most notably, the settlement will – also allowed us to repurchase 5.8% of our common shares outstanding from their group at a price of $13.19 per share. Looking to Q2 and beyond, we continue to expect that we will carry our strong momentum throughout the year and drive sustainable profitable growth through our Lifeboat Distribution business. Even in these challenging times, from a product perspective, we will continue to deepen our presence in our core verticals while delivering growth in newer verticals like cloud and connectivity. Across our business, we are maintaining our focus on generating double-digit organic growth in gross profit and we expect to flow through a significant portion of that growth to adjusted EBITDA. Integrating Interwork into Lifeboat Distribution's platform in the coming quarters will allow us to make us even stronger and continuing our progress towards this goal and further advance the momentum as a sales-driven organization. In addition, we are in the process of evaluating a comprehensive rebrand for the company to better reflect the strength of the two companies and our shared DNA with emerging technology brands and disruptors. We plan to have more details on this initiative soon. That aside, we will continue to operate diligently in this environment and remain cautious about the long-term impacts that the pandemic may have on our broader economy. With the latest information available to us today, we believe we are well positioned to continue executing in this environment and we are committed to supporting all of our partners in the months and quarters ahead. With that I'll open up to the operator for questions.

[Operator:]

Thank you, sir. [Operator Instructions] And our first question will come from Ed Woo with Ascendiant Capital.

[Operator:]

Our next question comes from the line of Peter Lucks [ph], Private Investor.

[Operator:]

Your next question comes from the line of Justin Jacobs, Private Investor.

[Operator:]

[Operator Instructions] Your next question comes from the line of Josh Peters with Zenith Sterling Advisers.

[Operator:]

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Foster for closing remarks.

[Dale Foster:]

Great. Thank you, Phyllis. I'd like to thank everybody that attended today's call. I appreciate your support keeping track of us and continue to watch us as we progress through Q2 and we'll talk to you when we do our next report at the end of Q2 and talk about Q2 results. And everybody please stay safe. Thanks.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. You may now disconnect your lines at this time. Thank you for your participation.