Climb Global Solutions, Inc.
Q3 2019 Earnings Call Transcript

Published: 10 Nov 2019

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Wayside Technology Group conference call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Melanie Caponigro. Ms. Caponigro, please begin.

[Melanie Caponigro:]

Thank you, and good morning. Welcome to Wayside Technology's Third Quarter 2019 Earnings Call. Before turning the call over to Dale Foster, the President of Lifeboat Distribution, I'll dispense with the customary cautionary language and comments about the webcast for this earnings call. We released earnings for the third quarter at approximately 9

[Dale Foster:]

Thank you, Melanie, and good morning to everyone. I appreciate everyone joining us today for today's call and discuss our third quarter 2019 operating results. I would like to introduce the speakers for today that would be joining me

[Charles Bass:]

Yes. Thank you, Dale. So we are now 20 months into the execution of our shift in strategy. We've been driving toward becoming a sales-led organization. And our strategy has focused on adding incremental field personnel and incremental vendor partners with a focus on cross-selling to our entire base of our customers. We've made two significant related investments. First, we've built our field sales team into seven geographically assigned sales territories. In addition to these sales teams, we've also dedicated field sales resources specifically focused on strategic customer accounts. These teams have been fully integrated into the existing Lifeboat inside sales teams, and we've implemented aligned goals to ensure that we're effectively driving consistent cross-selling behavior. Second, we've implemented a comprehensive vendor recruit plan. We've been using an establishment to recruit plan a methodology that's designed to work in concert with our outside sales teams, efforts to recruit resellers and cross-sell emerging technology brands to our partner base. We've used this vendor recruitment to evaluate over 300 new or emerging prospective vendors. And we've entered into contractual agreements with over 40 of those vendors based on a best fit for our go-to-market strategy. Both these investments in field sales and vendor recruiting are not point-in-time actions, but rather investments that we view as ongoing commitments to drive sales results. I would now like to turn the call over to Michael Vesey, our CFO, to discuss our third quarter financial results.

[Michael Vesey:]

Thanks, Charles. I'll review our financial results for the third quarter then discuss our balance sheet and liquidity. Overall, net sales for the quarter increased 9% to $52.4 million, compared to $47.9 million for the third quarter last year. Lifeboat Distribution sales were up 11% for the quarter to $48.8 million, while TechXTend sales were down 6% for the quarter to $3.6 million. Overall adjusted gross billings on a non-GAAP basis increased 11% to $149.1 million from $134.0 million in the prior year. The difference in growth rates between net revenue and adjusted gross billings on a non-GAAP basis is due to the change in mix of items recorded net of cost of sales under GAAP. Gross profit for the quarter increased 12% to $7.1 million compared to $6.3 million for the same period last year. Lifeboat Distribution accounted for all of the growth in gross profit, increasing 13% to $6.4 million compared to $5.6 million for the third quarter last year. The increased gross profit at Lifeboat was driven by both incremental sales from new product lines and growth in some of our existing lines. Gross profit from our TechXtend business remained relatively unchanged from the prior year. As discussed in previous quarters, the TechXtend business provides an opportunity for us to leverage our existing infrastructure and generate incremental profit contribution and cash flow. However, we believe our Lifeboat business provides the best opportunity for sustained growth. And accordingly, we have focused most of our sales and marketing efforts there. Gross profit margin as a percentage of net sales increased to 13.5% compared to 13.2% in the third quarter last year. The change in gross profit margin was mainly due to the change in the percentage mix of products recorded on a net basis under ASC 606. Under ASC 606, our gross margin as a percentage of net sales is a composite of items that are recorded net of the related cost of sales or an effective 100% reported gross margin and items that are recorded on a gross basis, particularly reflecting a high single-digit profit margin. During the third quarter of 2019, approximately 9.3% of our net revenues were from security maintenance and other products, which are recorded on a net basis or an effective 100% gross margin, compared to 8% in the same quarter last year. This shift in product mix had the effect of increasing gross profit as a percentage of net sales by 120 basis points. This increase was partially offset by lower gross profit margins on software and hardware products recorded on a gross basis. On a non-GAAP basis, gross profit margin as a percentage of adjusted gross billings remained constant with the prior period at about 4.7%. Total SG&A expenses for the quarter increased by $200,000 to $5.1 million compared to $4.9 million for the same quarter in 2018. The increase is primarily due to increased salary and commission expenses at Lifeboat to support the increased sales. SG&A expenses as a percentage of net sales for the quarter were 9.7% in 2019 compared to 10.2% in the prior year. Income before the provision for income taxes of - was $2 million for the quarter ended September 30, 2019, compared to $1.7 million for the same period in 2018. During the third quarter of 2019, the company recorded a provision for income taxes of $600,000 compared to $400,000 for the same period in the prior year. The company's current period provision for income taxes was impacted by an increase in the provision for state income taxes for states which have enacted economic nexus statutes. As a result, net income for the quarter ended September 30, 2019, was $1.4 million compared to $1.3 million for the same period in 2018. Diluted income per share for the quarter ended September 30, 2019, was $0.32 compared to $0.29 for the same period in 2018. Moving on to the balance sheet. We continue to manage a strong balance sheet and liquidity position with cash and cash equivalents of $10.2 million at the end of the period compared to $14.9 million at the end of 2018, and we have no outstanding borrowings under our $20 million credit facility. The decrease in our cash balance reflects an increased investment in working capital when compared to December 2018, reflecting seasonally lower payables due to year-end order volume and increased sales to one of our customers with extended payment terms. Stockholders' equity stood at $43.8 million compared to $40.6 million at the end of last year. Total working capital, including cash, was $40.6 million when compared to $36.2 million at the end of last year. We continue to run a capital-efficient business with return on invested capital of approximately 22% on a year-to-date basis for 2019 compared to 15% in the same period last year. We calculate return on invested capital by providing non-GAAP net income, excluding separation expenses, net of taxes, by our stockholders' equity, less cash. We continue to return a significant portion of our earnings to shareholders in the form of a dividend. On November 5, 2019, the Board of Directors declared a quarterly dividend of $0.17 per share of its common stock payable November 22, 2019, to shareholders of record on November 18, 2019. So in summary, our quarterly results continue to show a payback in the investments we made in vendor recruitment and sales and marketing since the beginning of 2018, with revenues increasing 9% over the third quarter of last year and gross profits increasing $800,000 or 12% over the prior year. The results also demonstrate the leverage in those investments and scale in the business with more than 40% of our incremental gross profit growth dropping through to the pretax income line. And notably, this growth was driven by our core strategy of investing in vendor recruitment and field sales at our Lifeboat Distribution business. We also continue to strengthen our balance sheet while returning over half of our net income to shareholders in the form of a dividend. I'll now turn it back to Dale. Dale?

[Dale Foster:]

Thanks, Mike. And as you can see, we've made some important progress this year in transitioning the company into a sales-first approach with a focus on vendor and customer relationships, and we're always enhancing our customer service to both our partners on the vendor side and the customer bar side. We have a great team here at Wayside, and we will continue to build on this success, along with targeting areas in the company that we can become more efficient, to increase our value to the customers and vendor partners. In closing, I'd like to recognize our Board of Directors and shareholders for their ongoing support and encouragement as we continue to make progress executing our long-term strategic business plan. At this time, I'd like to have the operator open the call up to our investor and the analyst community for questions.

[Operator:]

[Operator Instructions]. Our first question comes from Josh Peters.

[Operator:]

And our next question comes from Peter Lux.

[Operator:]

And at this time, there are no further questions. Please continue with any closing comments.

[Dale Foster:]

I think we're good at this time. Thank you, operator. And thank you, everybody.

[Operator:]

Ladies and gentlemen, thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

[Michael Vesey:]

Thank you. Bye, bye.