Climb Global Solutions, Inc.
Q4 2018 Earnings Call Transcript

Published: 26 Feb 2019

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Wayside Technology Group Conference Call. At this time all participants are in the listen-only mode. Later, we will conduct the question-and-answer session. Please note that all callers are limited to one question each. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's conference, Melanie Caponigro. Ms. Caponigro, you may begin your conference at this time.

[Melanie Caponigro:]

Thank you, and good morning. Welcome to Wayside Technology's fourth quarter 2018 earnings call. Before turning the call over to Steve DeWindt, the company's President and CEO, I'll dispense with the customary cautionary language and comment about webcast for this earnings call. We released earnings for the fourth quarter at approximately 5

[Steve DeWindt:]

Thanks, Melanie, and good morning everyone. Thank you for joining us today to discuss our fourth quarter and year-end 2018 operating results. This quarter and year had mixed results reflecting that this year was one of transition for the company. On the positive side, our sales and operational teams worked hard to deliver quarterly net revenue growth of 10% year-over-year and annual net revenue growth of 13% year-over-year. We also closed the year with overall adjusted gross billings on a non-GAAP basis of greater than $509 million, the first time that the company has cracked the half billion dollar mark. On the negative side, our gross margins in Q4 were squeezed due to competitive pressure and our product mix coming down to 14.7% compared to 16.9% last year with gross profit dollars for the year decreasing by 1% year-over-year. As we've mentioned before, our operating expenses increased due to our investing in business development and field sales personnel. Our net income for the year was down 30% due to the declining margin investment in additional personnel and separation expenses. However, net income for the fourth quarter was up by 54% year-over-year due to factors that include a lower federal tax rate. Waysides position in the marketplace has always focused on introducing new emerging vendors and technology into the IT sales channel. As you may have seen in recent press releases, we are continuing to do so having signed several new exciting emerging technology vendors throughout this year. With our many years of experience, we leverage our technical – technological expertise, our logistical support and our financial tools to assist these newer vendors in building out their national sales channel. In Q1, we began to invest in business development personnel as well as a regional field sales team. The business development team has been focusing on bringing new vendors into our product mix. The field sales team has been focusing on expanding and solidifying our reseller network with high-touch sales support. Both efforts have been successful. The numbers of new technology vendors and the increasing revenue from targeted segments of our reseller network gives credence to our approach. We're encouraged by the enthusiasm our reseller partners have shown in our initiative as we make investments now to position ourselves for the future. Our team is focused on delivering results and focusing on what our vendor partners need. We have seen some wonderful results in established vendors reducing the number of distributors they utilize, but maintaining their relationship with us. We continued to make progress towards our strategic goal of being the go-to boutique distributor for new technology vendors. We continue to have a strong balance sheet and have no debt currently outstanding. The company has historically returned some of our consistent profits to investors as a dividend with a current yield of greater than 5% and we have once again declared a dividend of $0.17 this quarter. This past quarter continues to show that demand for IT solutions delivered through a reseller channel remains strong with opportunity for shared gains and growth in security, hyperconverged, storage, data management and networking products. As we continue to add to our product portfolio, execute well with our field and inside sales teams, expand our customer base and focus on controlling costs and delivering our IT delivery and reporting systems. We are feeling very good about the outlook for this year. We look forward to sharing our progress on future calls. Let me now hand off to Mike Vesey, our Chief Financial Officer.

[Mike Vesey:]

Thanks, Steve. I'll review our financial results for the fourth quarter then discuss our balance sheet and liquidity. Overall, net sales for the quarter increased 10% to $49.1 million compared to $44.4 million for the fourth quarter last year. Lifeboat Distribution net sales were up 17% for the quarter to $44.3 million while TechXtend net sales for the quarter were down 27% to $4.8 million. As we have discussed in the past, our TechXtend business, which accounts for about 10% of sales tends to fluctuate from quarter-to-quarter based on the timing of deal flow, but does provide incremental cash flow by leveraging our existing infrastructure. The growth in lifeboat is more consistent and reflects some initial traction of the expansion of our vendor recruitment and field sales organizations. These expansion efforts began in January 2018 and added approximately $2 million in incremental expenses on an annualized basis. While this investment was a drag on earnings in 2018 as the teams build their pipelines, we feel it as a critical investment to increase our market share and gross profit on a going forward basis. Overall, adjusted gross billings on a non-GAAP basis increased 6% to $134.3 million from $127 million in the prior year. As discussed in prior calls, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers effective January 1, 2018. The adoption had no impact on gross profit or operating income, but resulted in a significant portion of our revenue being reported net of cost of sales and increased our gross profit margin percentages. Gross profit for the quarter decreased to $7.2 million compared to $7.5 million for the same period last year, reflecting the lower sales at TechXtend. Distribution gross profit for the quarter remains consistent with fourth quarter last year at $6.3 million, while as mentioned before, the TechXtend business declined 26% or $300,000 compared to the same quarter last year. Gross profit margin as a percentage of net sales decreased by 220 basis points to 14.7% compared to 16.9% in the fourth quarter last year. The change in gross profit margin was primarily impacted by two factors. First, the change in mix between products that were recorded net of cost of sales and on a gross basis under the new Revenue Accounting Standard. And second lower margins on product sales, which reported on a gross basis. Regarding the product mix issue, 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 100% reported gross margin and items that are recorded on a gross basis, typically reflecting a high single digit profit margin. The weighting of the two product categories in the composite margin is based on the relative percentage of GAAP revenue in each. During the fourth quarter of 2018 approximately 8.7% of our net revenues were from security maintenance and other products, which were reported net or an effective 100% gross margin compared to 9.9% in the same quarter last year. This change in mix accounted for approximately half of the 220 basis point decline in gross profit as a percentage of net sales quarter-over-quarter. The gross margin on products recorded on a gross basis declined from 7.8% to 6.6%, which accounted for the rest of the overall decline. This decline is mainly attributable to a higher percentage of our products – product sales being sold through our lifeboat distribution segment. Percentage margins on distribution sales are generally lower than reseller channel sales. However, they correspondingly carry a lower incremental sales cost below the gross margin line as well. Total selling, general and administrative expenses for the quarter increased by $100,000 to $5.1 million compared to $5.0 million in the same quarter of 2017. The increase was mainly due to higher personnel costs resulting from the investment in our business development and field sales organizations. SG&A expenses as percentage of net sales for the quarter were 10.3% in 2018 compared to 11.3% in 2017. Pretax income for the quarter ended December 31, 2018 was $2.3 million compared to $2.7 million during the prior year primarily as a result of lower gross profit at TechXtend. For the fourth quarter of 2018, the company recorded a provision for income taxes of $600,000 compared to $1.6 million in the prior year. The company's effective tax rate was 25.4% for the three months ended December 31, 2018, compared to 44.6% in the prior year. The change in effective tax rate reflects the new federal tax rates and acted as part of the Tax Cuts and Jobs Act 2018 as well as some one-time charges that were recorded in the fourth quarter of 2017 related to the adoption of the new tax law and state income tax adjustments. Our effective tax rate for the full year 2018 is 30.9%, which also reflects additional state tax expenses for states adopting economic mix statutes and the impact of IRS Section 162(m) limitations on separation expenses recorded in the second quarter of 2018. As a result net income for the quarter ended December 31, 2018 was $1.7 million compared to $1.1 million for the same period in 2017. Diluted income per share for the quarter ended December 31, 2018 was $0.39 compared to diluted income per share of $0.25 for the same period in 2017. For the full year 2018, net income was $3.5 million, down from $5.1 million in 2017. However, on a non-GAAP basis excluding separation charges for our former CEO, net income increased approximately 9.5% from $5.1 million in 2017 to $5.5 million in the current year. The change in tax laws contributed to this year-over-year change as well. GAAP diluted income per share for the full year ended December 31, 2018 was $0.78 compared to dilute income per share of $1.13 for the same period in 2017. Again on a non-GAAP basis, adjusted for the CEO separation expenses, diluted EPS was $1.23, a 9% increase over the prior year. Moving onto the balance sheet, we continue to manage a strong balance sheet and liquidity position with cash and equivalents of $14.9 million at the end of the period compared to $5.5 million at the end of 2017 and no outstanding borrowings under our $20 million credit facility. We paid approximately $800,000 in dividends during the quarter and as of December 31, 2018 stockholders' equity stood at $40.6 million compared to $38.7 million at the end of last year. Total working capital including cash was $36.2 million compared to $29.9 million at the end of the last year. In addition, our long-term receivable balances of approximately $3.2 million, which are not included in working capital are available to us as sources of future liquidity. On February 22, 2019, the board of directors declared a quarterly dividend of $0.17 per share if its common stock payable March 13, 2019 to shareholders of record on March 7, 2019. So in summary, our net income and EPS were up about 54% for the quarter primarily as a result of the new corporate tax laws. Our pretax income was down slightly primarily due to a soft quarter for the TechXtend business. However, our top-line growth was solid at 10% and our results include costs related to the expansion of our vendor recruitment and field sales teams at Lifeboat, which we will believe position us for future growth. We continue to strengthen our cash and equity position while returning approximately 55% of our annual non-GAAP net income, which excludes separation expenses in the form of a dividend. Steve?

[Steve DeWindt:]

Thanks Mike. I'm very pleased overall with our team's efforts in moving forward with a focused strategy and energetic pursuit of our goals. These efforts are paying off. And with that operator, let's open it up for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of [indiscernible]. Your line is now open.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from the line of [indiscernible]. Your line is now open.

[Operator:]

Thank you.

[Operator:]

Thank you. And our next question is a follow up question from the line of [Operator Instructions]. Your line is now open.

[Operator:]

Thank you. [Operator Instructions] And our next question is a follow-up question from the line of [indiscernible]. Your line is now open.

[Operator:]

Thank you. At this time that are no further questions, please continue with any further remarks.

[Steve DeWindt:]

Well, given, we sure appreciate all the support that we've been given by our shareholders. I must say it is fascinating to me to see the interest that people have in our stock in the company itself and the loyalty that people have. Holy smokes, we've got a lot of stockholders that have been shareholders for a long time. We've been very pleased with the reaction in the last two days. I'm looking right now. It's currently trading at $12.38, so thank you all. And Mike, do you have anything further, I don't.

[Mike Vesey:]

No, sir.

[Steve DeWindt:]

Okay then thank you very much and we look forward to talking to you next quarter.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. You may disconnect at this time and thank you for your participation.