Climb Global Solutions, Inc.
Q4 2019 Earnings Call Transcript

Published: 19 Feb 2020

[Operator:]

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, 2019. Joining us today are Wayside's CEO, Mr. Dale Foster; the company's CFO, Mr. Michael Vesey; the company's Vice President of Alliances for Lifeboat Distribution, Charles Bass; and the company's outside Investor Relations Adviser, Sean Mansouri, with Gateway Investor Relations. By now, everyone should have access to the fourth quarter and full year 2019 earnings release, which went out this morning at approximately 8

[Sean Mansouri:]

Thank you, Gene. Before I introduce Dale, I'd like to remind listeners that certain comments made in 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 generally 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 speak 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; net income, excluding separation expenses; and non-GAAP earnings per share 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 release and Form 8-K we furnished to the SEC this morning. Further, please be advised that the company, its directors and certain of its executive officers are participants in the solicitation of proxies from the company's shareholders in connection with the 2020 Annual Meeting of Shareholders. The company intends to file a definitive proxy statement with the SEC in connection with any such solicitation of proxies. Shareholders are strongly encouraged to read such proxy statement and all other documents filed with the SEC carefully and in their entirety when they become available as they will contain important information. Information regarding the identity of the company's participants and their direct or indirect interests by security holdings or otherwise can be found in the soliciting material filed by the company with the SEC on January 15, 2020, and updated information will be set forth in the company's definitive proxy statement and other materials filed with the SEC. These materials can be obtained for free through the company's website in the section, Invest or through the SEC's website. And with that, I'll turn the call over to Wayside's CEO, Dale Foster. Dale?

[Dale Foster:]

Thank you, Sean, and good morning, everyone. 2019 was a banner year for Wayside, highlighted by our strongest levels of net sales, gross profit and net income in company history. This is also our first year since 2011 of generating double-digit growth in gross profit, which is the primary metric we use to track our top line performance. These strong results reflect the continued execution of our simple, yet highly focused strategy. We began the execution of this strategy in 2018 by adding emerging technology vendors to our offerings across both core and new market segments while deepening our current relationships with -- and winning with new customers. This refined approach has benefited from the investments we made to restructure our vendor alliance team for new vendor recruitment, the build-out of our sales team and new sales team structure incentive programs that better align our interests and our economics with our partners and customers. Since I joined the company in 2018, the central element to the strategy has been our shift to a sales-driven organization through our Lifeboat Distribution business. Our execution of this pivot over the last 2 years has enabled us to return to consistent growth on both top and bottom line. But before discussing the quarter and year further, I'd like to pass the call over to Charles Bass to discuss our technology vendor and marketing highlights. From there, Mike will walk us through the financials. And then I come back to discuss the key highlights for the quarter and year-end as well as goals and objectives for 2020 and beyond. With that, I will turn the call over to Charles Bass.

[Charles Bass:]

Thanks, Dale. Speaking on our vendor development, we continue to effectively assess and onboard the right emerging technology partners to broaden our product suite. We placed a strong emphasis on targeting brands with products that complement our current offerings. That's reflected by our new partnership with Security Scorecard. They're a cybersecurity ratings provider. As we began to introduce Security Scorecard to our partners, many have found that their offerings are excellent complement to other security products that they resell. So we see great potential for cross-selling their brands products with our current security offerings. Security Scorecard is an outstanding example of just the type of vendor that we'll continue to recruit and onboard. We have been diligent over the last two years in developing and executing our new alliance strategy, which centers on identifying, evaluating and then onboarding high-potential emerging tech partners. We've now begun to align our marketing organization with this same strategy. Over the past year, our marketing team has taken a sales-enablement approach, offering broad, cost-effective marketing services to our partners. Ultimately, we believe that when our partners win, we win, and this commitment sets Lifeboat apart from our larger competitors, and it's the core of our alliance and marketing goals. Now I'd like to turn the call over to Mike Vesey to provide more details on our financial results. Mike?

[Michael Vesey:]

Thanks, Charles, and good morning, everyone. Jumping right into our fourth quarter results. Net sales in the fourth quarter of 2019 increased 24% to $60.9 million compared to $49.1 million for the same period in 2018. Lifeboat Distribution segment net sales in the fourth quarter increased 30% to $57.4 million compared to $44.3 million. TechXtend segment net sales for the fourth quarter were $3.5 million compared to $4.8 million. Adjusted gross billings, a non-GAAP measure, increased 25% in the fourth quarter to $167.5 million compared to $134.3 million for the same period last year. As we have stated to many of our shareholders 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 fourth quarter increased 9% to $7.9 million compared to $7.2 million for the same period in 2018. The increase was driven by our primary business segment, Lifeboat Distribution, which benefited from our continued execution in adding new technology vendors and continuing to deepen our relationships with current clients to drive organic growth. Total SG&A expenses in the fourth quarter were $5.3 million compared to $5.1 million in the year ago quarter. As a percentage of net revenue, SG&A decreased 150 basis points to 8.8% compared to 10.3% in 2018, demonstrating the scalability of our business as we continue to leverage the investments we made in 2018 by expanding our field sales and vendor recruitment presence, which in turn has increased gross profit without a proportionate increase in G&A. Net income in the fourth quarter of 2019 increased 16% to $2 million or $0.45 per diluted share compared to $1.7 million or $0.39 per diluted share for the same period in 2018. This quarter, we have introduced adjusted EBITDA as a non-GAAP metric, as we believe it is a useful supplemental metric to assess our profitability and company value. In the fourth quarter, adjusted EBITDA increased 11% to $2.9 million compared to $2.6 million in 2018. The increase in adjusted EBITDA was driven by organic growth with existing clients 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 90 basis points to 37.1% compared to 36.2% in the prior period. On February 18, 2020, the company declared a dividend per share of $0.17, which is payable on March 6 to shareholders of record on March 2, 2020. Now quickly running through our full year results. Total net sales in 2019 increased 15% to $208.8 million. Lifeboat Distribution segment net sales increased 18% to $193.6 million and TechXtend segment sales declined to $15.2 million compared to $17.9 million. Adjusted gross billings in 2019 increased 18% to $601 million compared to $510 million in 2018. Gross profit in 2019 increased 11% to $30 million, and total SG&A was down 6% to $21.5 million compared to the prior year. As a percentage of revenue, SG&A decreased 220 basis points to 10.3%. Net income in 2019 increased 92% to $6.8 million or $1.51 per diluted share and adjusted EBITDA increased 14% to $10.5 million compared to $9.2 million in 2018, reflecting nearly 50% flow-through from our growth in gross profit. Note that the 2018 net income included $2.4 million of separation expenses related to a separation -- executive's departure. Non-GAAP net income, excluding separation expenses, net of taxes in 2019 increased 24% to $6.9 million compared to $5.5 million last year. Effective margin also increased 70 basis points to 34.8% compared to 34.1% in the prior year, further reflecting the scalability of our business. Dividend per share declared in 2019 was $0.68, which is consistent with the prior year. We continue to maintain a strong balance sheet and liquidity position. Cash and cash equivalents were $15 million at December 31, 2019, compared to $14.9 million at December 31, 2018, and we remain debt-free at both December 31, 2019, and December 31, 2018. Also note that we earned a return on invested capital of 24.5% for the year, demonstrating the capital efficiency of our software distribution business model. This concludes my prepared remarks, and I'll turn the call back over to Dale.

[Dale Foster:]

Thanks, Mike. I'd like to discuss some of the key highlights and initiatives that we have continued to execute for approximately the last 2 years, as this is what has led Wayside back to its strongest levels of growth and profitability in many years. As we have previously discussed, we made fundamental changes in 2018 that positioned Wayside as a sales-focused organization. And this year, we made further enhancements to our sales model to better incentivize our teams across the country. This change in team structure and compensation allows us to closely simulate our vendor and customers go-to-market strategies. As Mike mentioned, we continue to generate strong growth with both new and existing partners during the fourth quarter. In December, we brought in, which we believe is the largest booking in company history without naming names, this franchise is a favorite of fast and healthy Mexican food. From a vendor perspective, we are experiencing growth in both core and new verticals. Keeping in mind our goal to onboard and cross-sell new vendors to overlay and supplement our existing core vendors. Our ability to leverage the expertise and insight gained in our core verticals to deliver growth for the first time in new areas like connectivity, speaks volumes to the quality of our team and the process in place today. Our success with new vendors and new verticals has significantly added our efforts -- aided our efforts to deepen relationships with current customers and grow our overall customer base. With all of this said, it is clear that our improved results for 2019 underscores the validity and scalability of our investments these last 2 years. Before I get into key objectives for 2020, I'd like to briefly discuss the unsolicited proposal we received from N&W Group last year. On December 10, 2019, we received a preliminary unsolicited proposal from Shepherd Kaplan Krochuk and North & Webster to acquire the company at $16.38 per share, subject to certain conditions. Although the N&W Group's offer expired on December 16, 2019, the Board took extensive measures to evaluate their proposal, including engaging Stifel Financial Corporation to act as a financial adviser to the Board. Wayside management, members and the Board of Directors and Stifel, engaged with the principles of N&W Group on multiple occasions discussed -- to discuss their expired bid. After a thorough review of the inbound inquiry and consultation with our advisers, the Board determined the expired bid was not in the best interest of shareholders and did not serve as a basis for further diligence or discussion. This was communicated to N&W Group on February 11, 2020. The Board has engaged in constructive dialogue with N&W for several months prior to the receiving their proposal as the Board and our management team are always open to receiving constructive input toward our goal of increasing long-term shareholder value. Additionally, the Board engaged an Investor Relations team at Gateway Group in the fourth quarter of 2019. This further demonstrates our commitment to building robust regular and ongoing shareholder engagement program. As I mentioned, Wayside is in its early innings of the next stage of growth. I joined the team just over 2 years ago and took over as CEO last month. You can see from our results, we are moving towards an inflection in our business that has us generating double-digit growth on both the top and bottom line, with significant portion of our growth in gross profit flowing through to pretax income. There are also many opportunities for us to accelerate this growth through M&A, which the company has not evaluated in the past. I want to thank our teams at Wayside for their dedication and hard work to get us to this point. I'd also like to thank the shareholders for their patience over the last 5 years, while the company had flat to even declining performance at times. I believe your patience will continue to pay off as we embark on this next evolution of growth. Lastly, I'd like to thank our Board of Directors for entrusting me and with running the company. They have been very supportive of my go-forward plans from the day I took over. We now have a deep board expertise in finance, compliance, M&A, industry-specific knowledge and strategic planning. It has been a pleasure to work in lockstep with them. As we look to 2020, we plan to carry our strong momentum through this year and drive sustainable, profitable growth through our Lifeboat Distribution business. From a product perspective, we will continue to deepen our presence in the core verticals, while delivering growth in newer verticals like cloud and connectivity. We will also remain opportunistic in terms of capital allocation for M&A and strategic opportunities and with scalability in our business model, we continue to believe that we can flow through a significant portion of our growth in gross profit to pretax income. We look forward to further executing on our strategy and delivering value to all Wayside shareholders in 2020 and the many years ahead. Operator, we'll now open this up for questions. Thank you.

[Operator:]

[Operator Instructions]. And our first question will come from Ed Woo from Ascendiant Capital.

[Operator:]

Your next question comes from the line of Josh Peters from Zenith Sterling.

[Operator:]

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

[Dale Foster:]

Again, thanks, everybody, for joining us today on the call to just to hear about our 2019 results and Q4 results. I appreciate our shareholders and look forward to a good 2020 going forward. So I appreciate it. Thank you.

[Operator:]

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