Climb Global Solutions, Inc.
Q3 2017 Earnings Call Transcript

Published: 28 Oct 2017

[Executives:]

Melanie Caponigro - Director of Accounting Simon Nynens - Chairman and Chief Executive Officer Bill Botti - Executive Vice President Michael Vesey - Vice President and Chief Financial Officer

[Analysts:]

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Wayside Technology Group Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a 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.

[Melanie Caponigro:]

Thank you and good morning. Welcome to Wayside Technology's Third Quarter 2017 Earnings Call. Before turning the call over to Simon Nynens, the Company's Chairman and CEO, I will dispense with the customary cautionary language and comments about the webcast for this earnings call. We released earnings for the third quarter at approximately 5

[Simon Nynens:]

Thank you, Melanie, and good morning to everyone. Despite intense market competition, we delivered satisfactory results for Q3. Net sales increased 7% and earnings per share increased $0.01 to $0.30 per share for the quarter. On a year-to-date basis our earnings per share are up $0.04 per share or 5%. Our LIBOR division represented 87% of our gross margin and 91% of segment income in the third quarter. Our cash, prepayments and long-term receivables amount to $21.8 million or 57% of our equity. I would also like to share and thank Bill Botti who announced his intention to retire from his position as Executive Vice President effective December 31, 2017. Bill will continue in his current role till the end of the year as he transitions his responsibilities to other team members, and I’d like to thank Bill on behalf of Wayside Technology Group for his great contributions during his tenure as a member of our team. Now I’d like to hand it over to Bill. Bill?

[Bill Botti:]

Thank you, Simon. Net sales for the quarter ended September 30, 2017, increased 7% to $107 million compared to $100 million for the same period in 2016. Lifeboat Distribution segment net sales for the quarter ended September 30, 2017, increased 10% to $100 million compared to $91 million for the same period in 2016. TechXtend segment net sales for the quarter ended September 30, 2017, decreased 24% to $6.5 million compared to $8.5 million for the same period in 2016 due to a decline in extended payment term transactions, which typically vary significantly from quarter-to-quarter based upon the timing of IT-spending decisions by our larger customers. Gross profit for the quarter ended September 30, 2017, decreased 2% to $6.2 million compared to $6.4 million for the same period in 2016. Lifeboat Distribution segment gross profit for the quarter ended September 30, 2017 and 2016 was consistent with the prior year at $5.4 million. TechXtend segment gross profit for the third quarter 2017 decreased 11% to $0.8 million compared to $0.9 million in 2016. Gross profit margin, which is gross profit as a percentage of net sales, for the quarter ended September 30, 2017, decreased by 0.5 percentage points to 5.9% compared to 6.4% for the same period in 2016. Lifeboat Distribution segment gross profit margin for the quarter ended September 30, 2017, decreased by 0.6 percentage points to 5.4% compared to 6% for the same period last year. TechXtend segment gross profit margin for the quarter ended September 30, 2017, increased 1.8 percentage points to 12.8% compared to 11% for the same period in 2016. We continue to face margin pressure from the very large distribution companies we compete within the market. This is reflected in the 0.6 points in our gross profit margin in the Lifeboat business. We continue to be excited about our future as we manage our expenses and build our product portfolio to help achieve our growth targets. As Simon stated early, I have announced my planned retirement at the end of this year. I've very much enjoyed working with Simon, the Board of Directors, the Leadership team and the staff of our Wayside Lifeboat and TechXtend teams. I'm very confident in the leadership that we've put in place for Lifeboat in Brian Gilbertson and for TechXtend in Kevin Askew. Both have been running sales operations for their businesses for most of this year, and I have high expectations for their continued effect on our growth. Thank you, Simon. Back to you.

[Simon Nynens:]

Thank you. Mike Vesey will now report on the financial numbers. Mike?

[Michael Vesey:]

Thanks, Simon. I'll review our operating expenses and some balance sheet highlights. Total SG&A expenses for the quarter increased approximately 2% from the same period last year to $4.5 million. The increase was mainly due to personnel-related expenses to support our growth and professional fees. SG&A expenses as a percentage of net sales decreased to 4.2% compared to 4.4% for the same period last year, reflecting a modest increase in expenses in relation to the rate of sales growth. As Bill and Simon noted, net income for the third quarter was down slightly from the third quarter last year at $1.3 million compared to $1.4 million in the prior year, while diluted earnings per share increased slightly due to a lower number of shares outstanding. During the quarter, we determined that we should be calculating our earnings per share using the two-class method, which treats unvested shares or restricted stocks granted under our stock compensation plan as participating securities, because these securities have a non-forfeitable right to dividends prior to vesting. Under this method, our distributed and undistributed net income is allocated between the participating securities and common shares before calculating earnings per common share. While we do not consider the impact of the change in the calculation method to be material, we did restate prior amounts in this earnings release so that historical information is on a comparable basis. The impact of restating the prior year was to decrease third quarter 2016 diluted earnings per share by $0.02 or about 4.2% and year-to-date diluted earnings per share by $0.03 or 4.3%. Basic shares outstanding is the same under the two methods. And you will also note that under the two-class method, the basic and fully diluted share count is the same since there are no other common stock equivalents other than the participating restricted stock. A table comparing the previously reported and restated amounts is included in our earnings release, and we'll provide more detail in our 10-Q. It should be noted that there was no adjustments to net income as part of this calculation. It's merely a recalculation of the earnings per share itself. So on a restated and comparable basis, diluted net income per share increased 2% to $0.30 for the quarter compared to $0.29 in the same period last year. Weighted average diluted shares outstanding decreased about 5% from the same quarter last year, reflecting share repurchases we made over the past 12 months. On a year-to-date basis, our net income was relatively flat year-over-year at $3.9 million. And our diluted earnings per share is up about 5%, reflecting the lower weighted average shares outstanding resulting from the share repurchases. Moving on to our balance sheet. Cash and cash equivalents was $4.1 million at the end of the quarter compared to $13.5 million at the end of the year for 2016. You will also note that we utilized our revolving credit facility this quarter to fund some of our working capital needs, with $2 million outstanding at the end of the quarter. Our use of cash was the result of an increased investment in working capital and $5.1 million returned to investors through dividends and repurchase of our common stock year-to-date. The increased working capital is primarily driven by vendor prepayment of approximately $8 million that was made as part of a new-vendor agreement, and the impact of a higher-than-average level of extended payment sales in Q4 2016. The products related to the Q4 sales were paid for in the first quarter of 2017, while the sales proceeds themselves will be collected over future periods, resulting in a net out -- cash outflow in 2017. During the quarter, we paid $800,000 in dividends, and utilized about $500,000 of our cash balance to purchase approximately 28,000 shares of our common stock. As of September 30, 2017, stockholders' equity stood at $38.1 million compared to $37.6 million at the end of last year, and total working capital, including cash, was $25.5 million compared to $24 million at the end of last year. Additionally, we had about $10.2 million in extended term receivables due after one year compared to $11.1 million at the end of 2016. We plan to continue to utilize our cash and available liquidity to invest in the growth of our business. On October 24, 2017, the Board of Directors declared a dividend of $0.17 per share, payable on November 17 to shareholders of record on November 10, 2017. Now I'll turn it back over to Simon.

[Simon Nynens:]

Thank you, Mike. I want to thank all of our team members for their hard work and dedication for the success of our company. Operator, we can now start the Q&A session.

[Operator:]

[Operator Instructions] And our first question comes from the line of Sam Schaefer. Your line is now open.

[Operator:]

[Operator Instructions]. And at this time, there are no further questions. Please continue with any closing remarks.

[Simon Nynens:]

Thank you. We thank everyone for their interest in our company. And we look forward to reporting our year-end results at the beginning of February and 2018.

[Operator:]

This concludes today's conference call. You may disconnect at this time. And thank you for your participation.