Wayside Technology Group, Inc.
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

Good morning, ladies and gentlemen, and welcome to 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 your conference at this time.

[Melanie Caponigro:]

Thank you, and good morning. Welcome to Wayside Technology's second quarter 2013 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 first quarter at approximately 5 PM Eastern Time, Thursday, July 25, 2013. The earnings release is available at the company's Investor Relations website at waysidetechnology.com. Today's call, including all questions and answers is being webcast live and a rebroadcast of this call will be available at waysidetechnology.com/earnings-call. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, July 26, 2013. A detailed discussion of risks and uncertainties are discussed in our Form 10-Q and also in greater detail in our Form 10-K. Wayside Technology Group Inc. sees no obligation to update and does not intend to update any forward-looking statement. Now, I would like to turn the call over to Simon Nynens.

[Simon F. Nynens:]

Thank you, Melanie and good morning to everybody. We are pleased to report solid quarterly results. Sales were up 7% and net income was up 18%. Our Lifeboat Distribution segment delivered solid results, as it continues to execute on its strategic plan, and a good thing is, margins stabilized in this quarter. Our TechXtend segment revenues were down, compared to an exceptionally strong Q2 last year, which benefitted from a strong level of extended payment through sales transaction business in this prior period. Regarding our balance sheet and share price, if you add up our cash marketable securities and long term receivables, you basically end up with a balance of about $22 million. That's around 70% of our equity. Looking at our market cap right now, this amounts to about 38% of our market cap. So you end up with a balance of about $35 million. That's for a company that generated income from operations of $8.5 million in 2012, and phased out a dividend of $0.64 a year. We provide easy access to the right IT products. In addition to our electronic license delivery systems, our outstanding customer service levels, and our dedicated sales reps, truly sets us apart. As we continue to explore, define and build our competitive advantages, we continue to invest in our company. We have the right tools in place to add more publishers, including a great team and a great IT infrastructure; and although we cannot influence the larger economic forces that are at work, we do look forward with great confidence in our team. Now I would like to hand it over to Dan Jamieson, our Vice President and General Manager of our Lifeboat division. Dan?

[Daniel T. Jamieson:]

Thank you, Simon. Lifeboat's Q2 2013 results reflect positive year-over-year growth across all cylinders of our business. The key factors in Lifeboat's Q2 performance, with the successful penetration and expansion of pivotal software lines, within a variety of Lifeboat's premier reseller accounts. The large account resellers and the DMRs, the direct market resellers, along with the successful expansion of business within targeted solution provider accounts, including VARs, the value-added resellers; SIs, the systems integrators, and other consultancy type companies. Lifeboat successfully launched our first ever western partner summit at Planet Hollywood, in Las Vegas, Nevada during Q2. The event was a strong success with 25 vendor sponsors participating, and nearly 70 reseller attendees from over 50 newly attending reseller partner companies worldwide. These are unique and different partners from our traditional [Easter] event in Atlantic City, New Jersey, which is in its sixth year running, and will take place during Q3 in October, at Caesar's Palace, in Atlantic City, New Jersey. Lifeboat expects to welcome 35 to 40 vendor sponsors, with over 250 reseller attendees, participating from 100 different reseller organizations from around the world at our October Partner's Summit event, in Atlantic City this year. Thank you, Simon.

[Simon F. Nynens:]

Thank you, Dan. Now, I would like to hand it over to Shawn Giordano our Vice President of our TechXtend division. Shawn?

[Shawn J. Giordano:]

Thank you, Simon. Despite a challenging quarter due to a decrease in extended payment term transactions, the TechXtend sales team delivered solid results in our solutions focused run-rate business. Our sales team continues to deliver value to our customers, in the areas of virtualization and cloud, storage and data management, business intelligence and information management. Our continued focus on building long term relationships with our clients, and acting as trusted advisors, enables us to help our customers achieve business efficiencies by leveraging best of breed technology. We believe our ability to deliver easy access to the right IT solutions is what sets us apart from our competitors. In conclusion, I'd like to thank all of our back office and support teams, without their hard work, our success would not be possible.

[Simon F. Nynens:]

Thank you, Shawn. Tom Flaherty, our CFO, will now discuss the financial details. Tom?

[Tom Flaherty:]

Thank you, Simon, and good morning to our investors, analysts, employees and friends. I will discuss our second quarter financial results, both on a consolidated basis, as well as by business segment. Net sales for the second quarter of 2013 were $74.1 million. This is compared to $69.2 million in Q2 last year, representing a 7% increase on a consolidated basis. Sales for our Lifeboat Distribution segment were $61.2 million, and represents 83% of our total revenue during Q2. Lifeboat sales reflect a 14% increase, compared to Q2 of last year. The increase, as Dan mentioned, was mainly a result of our increased account penetration, our continued focus on expanding virtual infrastructure centric business, and the cumulative impact of key product line additions. Sales for our TechXtend segment were $12.9 million compared to $15.6 million in Q2 last year, representing an 18% decrease. This decrease was primarily due to a decrease in extended payment terms sales transaction in Q2, as compared to exceptionally strong extended payment term sales last year. On a consolidated basis, our gross profit was $6 million, compared to $5.6 million for the second quarter of 2012, representing a 7% increase. Our gross profit margin for the second quarter of 2013 was 8.1%, which was the same as last year. Lifeboat Distribution's gross profit for the second quarter was $4.5 million. This, compared to $3.8 million in Q2 last year, represents a 17% increase. This increase was primarily due to higher sales volume in the current year. Our TechXtend segments gross profit was $1.5 million, and decreased by 17% as compared to last year. The decrease in gross profit margin was primarily due to lower volume of extended payment term deals. The company monitors gross profits and gross profit margins carefully. Price competition in our market persisted in the second quarter of 2013. We anticipate that margins will continue to be affected by these current trends, and in addition, we anticipate that the recent trend of decreasing vendor rebates and discounts will continue to negatively impact gross profit margins. Total selling, general and administrative expenses were $3.8 million compared to $3.6 million in Q2 last year. This increase is primarily the result of an increase in commissions and bonus for our Lifeboat segment, which are based on gross profit, and an increase in salary expense, from increased headcount and sales, finance and operations in 2013, compared to 2012, and this is offset in part by decrease in commissions and bonus for our TechXtend segment, which are also based on gross profit. Our net income for the second quarter of 2013 was $1.5 million, compared to $1.3 million in the prior year. To be noted, that Q2's income tax rate was lower, primarily due to a change in the state of New Jersey apportionment rules, which lowered our state tax rate, as compared to the prior year. Earnings per share on a fully diluted basis was $0.34 per share, compared to $0.28 per share in the prior year. This increase is primarily due to higher net income. Moving on to the balance sheet; compares to our balance sheet as of December 31, 2012, the following key accounts had fluctuations. Cash and marketable securities was a healthy $12 million at June 30, compared to $14.2 million at December 31. This decrease is comprised primarily of $730,000 of positive cash flow from operations. However, it should be noted that this included a $1.6 million payment in January for 2012 expenses, so adding this back would be $2.3 million positive cash flow from operations. This is offset by dividend payments of $1.5 million, and $1.2 million of purchases of our treasury stock. Accounts receivable, current and long term decreased by 15%. This is due to a lower level of sales volume in Q2, as compared to Q4 2012. Q4 is typically our strongest quarter of the year. Accounts payable and accrued expenses decreased by 22% due to a decrease in purchases, to support a lower sales volume in Q2, as compared to Q4 2012. The company has no other debt. We do however have a $10 million revolving credit facility that can be used for working capital purposes, including financing of larger extended payment term sales transactions. As of June 30, we have no outstanding balances under the credit facility. Because we believe our stock price is undervalued. During the quarter, we continued to repurchase approximately 59,000 shares of our common stock under a 10B5-1 stock purchase plan. We still have authorization to buyback approximately 253,000 shares. Our stockholders' equity now stands at $32.3 million and cash makes up 37% of equity. Working capital at the end of the quarter amounted to $22.7 million. At our July 24 board meeting, the Board of Directors declared a $0.16 dividend per share for its common stock payable August 16 to shareholders of record on August 6, 2013. In conclusion, the company continues to have strong operating results, a strong balance sheet, and is adequately capitalized to support our continued growth plans. I want to personally thank all of our team members worldwide, and especially the staff in the finance and HR department for their hard work and dedication. Back to you, Simon.

[Simon F. Nynens:]

Thank you, Tom. In conclusion, we thank our vendors, the software publishers, for their trust and partnership. We are a flexible, proactive, and knowledgeable partner, who acts like an extension of the vendor sales and marketing team. We remain focused on adding new publishers, providing our customers with excellent customer service, and providing our employees with a great and rewarding working environment. Thank you. Operator, we can now start with the Q&A session.

[Operator:]

(Operator Instructions). Our first question comes from Bert Boksen of Eagle Asset Management. Your line is now open.

[Bert Boksen:]

Yeah, hi Simon, how are you?

[Simon F. Nynens:]

Good morning.

[Bert Boksen:]

Hey, this was a nice quarter, just a couple of little disappointing -- now I am not understanding your reference, the competitive environment is still very difficult, but you seem to have a good quarter despite it, in Lifeboat for sure, and I am wondering if those trends are sustainable, or your reference to the competition means things are getting bad again? I am not sure what contributed to this nice Lifeboat quarter? Maybe expand on that for me.

[Simon F. Nynens:]

Absolutely. I think what we are seeing overall is that the environment then really changed. But I think what did change is the fact that the vendors that we represent, continue to grow at excellent rates, and it wasn't just one or two large vendors that we represent, it was basically what we saw was across the board, a nice increase in their overall sales, and we benefitted from that. In addition I think, the environment, the way we see it also going forward, is not getting worse, I think it stabilized. And the good thing for us was to see that our gross profit, despite the fact that we attained lower rebates in Q2, actually went up slightly for Lifeboat. So that for us is very positive to see. TechXtend as well, went up slightly. The reason there is because we had a lower level of FBO business, which resulted because those larger deals typically carry lower margins. But I think overall, you are absolutely right, we are very happy with the current trend, and we'd like to continue that, and the good news, especially is that the margins have stabilized, and I think we can really benefit from that -- if the current trend continues in Q3 and Q4, and right now that seems to be the case.

[Operator:]

(Operator Instructions). Our next question comes from Chris Parker, a private investor. Your line is now open.

[Chris Parker:]

Thank you. Good morning Simon, and yeah congratulations, I will echo the previous caller. Congratulations on -- I think this is the best quarter in eight years -- in earnings. A question about the sales of extended payment terms. A couple of parts to the question. One is, I notice they are down, the reason you took up the revolver was in anticipation of making more of these sales down the line, and having flexibility to finance them, and make the bigger extended payment term sales. What do you think you need to fix to target that market a little better going forward. If you don't think, you will successfully target that market going forward, do you need the revolver? The third part of the question would be, if you don't need the revolver, or with the revolver, do you have the flexibility to do more stock buybacks, or even a Dutch tender, and how about a little bit of an increase from the dividend, even $0.05 a year, it would be really nice to see at least a slowly growing dividend over time.

[Simon F. Nynens:]

Right, as far with your dividend question, that is something that we've discussed on a quarterly basis, we have had increases in the past, and that's definitely going to be discussed in Q3 and Q4. With regards to your question, with regards to revolver, you are absolutely right, a certain portion of our large finance deals were and are related to Quest Software. Quest Software became part of Dell and basically what happened is, Dell has a financial arm as well, and they are also utilizing that facility now, which is impacting us on a somewhat level. So we are trying to expand the offerings to our other software publishers, and to other clients. Having said that, it's a very competitive environment, as the remainder of our business by the way, there is no surprise there. But what we have seen with the increase in interest rates lately, we really have to be careful not lock ourselves in, in terms of these interest rates for two or three years in a rising interest rate environment. So that's two factors I think play into that, those two factors. With regards to the flexibility of the revolver, Tom if you can respond to that, that will be great.

[Tom Flaherty:]

Yes, we negotiated a really big deal on the revolver. There is no standby fees, so there is no cost to us to have it. So the plan was to put it in place before we needed it, and in the event we did need it, so it's always there in the event we needed to draw it, both for working capital purposes and to finance the extended payment term deals.

[Operator:]

(Operator Instructions). At this time, there are no further questions, please continue with any closing comments.

[Simon F. Nynens:]

Thank you, operator. We appreciate everybody's interest in our company, and we look forward to report our financial results in October of this year. Thank you.

[Operator:]

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