Climb Global Solutions, Inc. Q4 FY2020 Earnings Call

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, 2020. Joining us today are Wayside CEO, Mr. Dale Foster; and company's CFO, Mr. Michael Vesey; and the company's outside Investor Relations Advisor, Sean Mansouri with Gateway Investor Relations. And by now, everyone should have an access to the fourth quarter of the full-year of 2020 earnings release, which went out yesterday afternoon at approximately 4:15 pm Eastern time. The release is available in the Investor Relations section of the Wayside Technology Group website at waysidetechnology.com. This call is also available for webcast replay at the company's website. Following management remarks, we'll open the call for your questions. I would now like to turn the call over to Mr. Mansouri, for some introductory comments. Thank you.

Thank you. 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 speaks 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 measure in accordance with SEC rules. You'll find reconciliation charts and other important information in the earnings release and Form 8-K that we furnished to the SEC yesterday. I'll now turn the call over to Wayside CEO Dale Foster. Dale?

Thank you, Sean, and good morning, everyone. We ended 2020 on a very strong note delivering growth across all our key financial metrics for the fourth quarter. Gross Billings, net sales, and gross profit increased to record levels during the quarter as we maintained our focus on adding new emerging vendors to our line card, integrating CDF, and driving additional synergies from our acquisition of Interwork. Both acquisitions are contributing to our top and bottom line as our business organically recovers from the lows of the pandemic in the second quarter, and we are back on track and executing our growth strategy. Our ability to navigate through the pandemic would not have been possible if it were not for the resilience and exceptional support from our employees, customers, and vendors across the globe. And we genuinely thank you. Our growth strategy can be broken down into three key initiatives: first, continue to drive organic growth and revenue from our business by deepening existing vendor relationships; second, diversifying our vendor line card by adding new emerging vendors with above-average long-term growth potential; and third, we'll utilize our balance sheet and our cash and free cash flow to identify and make accretive acquisitions, all the while improving our overall profit margin. The two acquisitions we completed in 2020 further expand our suite of products and the depth and breadth of our vendor network. The acquisitions significantly increased and enhanced our team's go-to-market approach. As a result of these acquisitions, our team nearly doubled from 150 to 270 employees today, an accomplishment I'm particularly proud of, knowing full well that this is the engine we're building for our future success. With our acquisition of Interwork now fully integrated, the Climb and Interwork teams are executing as a single unified team across the U.S. and Canada under the Climb branding. We're doing an excellent job identifying valuable cross-selling opportunities in both markets. We've had a significant number of sales wins with some of the largest resellers in North America due to our expanded portfolio and our strategic vendors. Through Interwork, we have deepened our relationships with previously overlapping vendors such as Acronis with their cloud-based offering, and we're now able to add Trend Micro, a significant vendor to our partner network in both Canada and the U.S. Our integration and expansion with UK-based CDF is well underway as our legacy European office in Amsterdam now reports to the CDF distribution Vice President. We continue to see consolidation and cost savings as we go forward. There will be fewer overlapping vendor relationships with the CDF acquisition, providing significant cross-selling opportunities between EMEA and our U.S. and Canada salesforce. We are becoming more united each day as we continue to develop a strong and focused sales team and culture of success. With the acquisition of CDF, we inherited a notable presence and strong partner relationships across Europe, developed over the past 20 years. By combining the Climb distribution and CDF distribution teams and operations teams, we're now the exclusive European provider of Intel software's developer tools. Cloud Know How, a division of CDF cloud services business, holds and maintains vendor certifications with marquee vendors such as Microsoft, Flexera, Quest, and many others, further bolstering our cloud credentials. Leveraging Cloud Know How's cloud services business, a specialized team of adaptation and migration experts, advances our position and standing with our reseller partners, making us a viable value-added service provider. This represents a significant strategic leap beyond our traditional IT distribution function, another important element of our CDF acquisition. Importantly, this offers real opportunity for Wayside to expand its overall operating profit margin. Now Climb Channel Solutions and CDF can provide CDF customers with services ranging from everyday technical support to specialized consulting and become an indispensable partner to our customers. On a product level, CDF helps expedite the development of our internal cloud platform, which can be utilized by all our subsidiary businesses across the geographies. We expect to launch new vendors onto the cloud marketplace in April and we'll continue to roll out as many vendors that are moving to a subscription-based cloud model. Before discussing our vendor alliance strategy, which focuses on identifying and onboarding high potential emerging technology vendors, I would like to share a few words about the SolarWinds software cyber-attack that occurred during the 2020 fourth quarter. Wayside's operations were not directly affected. Our organization was not using the version of software that contained the compromised code. Our vendor partnership with SolarWinds accounted for less than 10% of our 2020 gross profit. To be sure, we experienced some sales weakness as a result since the cyber-attack was publicized, but we have maintained a solid relationship with SolarWinds and its full suite of security and emerging technology products. We will continue to work closely with our vendors to preserve the safety and security of our offerings and remain as supportive of our partner as we can. Let me now highlight a few important vendor wins and updates from the quarter. In November, we began distributing Zendesk's customer relations management software. The service-first customer package offering is a powerful and flexible software designed to help companies foster better communication and relationships to scale. Through its CRM offering, businesses can offer a unified customer interface while seamlessly engaging with their customers across multiple channels including email, chat, voice, WhatsApp, WeChat, and other social media messaging apps. Zendesk is a very well-known and successful brand, now expanding its route to market to include distribution via Climb Channel Solutions as the only distributor. We expect to be a big part of Zendesk's increased sales growth in the channel in 2021. In addition to offering solutions with frontend interfaces, we are expanding our core technology product offerings from data centers and cohesive backend operations. We are now distributing SUSE innovative open-source solutions which comprise a best-in-class Linux operating system, a market-leading Kubernetes management platform, and a host of pioneering edge capabilities. These capabilities allow data centers to efficiently integrate all products in the core of their operations. Through our distribution partner with SUSE, we now offer their open-source solutions with an expanded partner base delivering incremental value to our vendors throughout North America. I'd like to highlight a unique success we enjoyed with one of our key partners, Tintri, which is owned by DDN. Over a year ago, Tintri and Climb agreed on a mutual investment plan to increase sales. We both made substantial investments in brand enablement, marketing, and key personnel. Our investments are paying off during the fourth quarter. Tintri became a top five brand for Climb Channel Solutions while becoming a focus brand for our entire global sales team. I'm extremely pleased with the vendors and products we have added to our portfolio during the fourth quarter and the year just ended. Each enhances our offering in core product areas and serves as a testament to the continued focus and growth of our business. I would also like to acknowledge the incredible leadership of Charles Bass and our entire vendor alliance team. In December, Charles was promoted to Chief Marketing Officer, a newly created executive role at Wayside Technology Group. Under his leadership, our teams work diligently to drive brand awareness, improve marketing efforts, and bolster sales and vendor alliance strategies. The results have been excellent and are evidenced in our record results in the fourth quarter and the year. Finally, a new strategic initiative that we just started last year was to build upon our organic growth strategy. We launched a division called Climb Elevate, a wholly owned subsidiary of Climb Channel Solutions and the next logical extension of our strategy to target new and emerging technology brands. Climb Elevate focuses on efficient code-to-ship processes for brands that aren't quite ready for full distribution partnership with Climb. This will increase our addressable market and the breadth of our potential new and exciting brands that we can take to market at full scale in the future as they develop. This new division will be led by an industry veteran, Michael Bernstein, who joins us after a 26-year career at CDW. Climb Elevate will strengthen our overall market position. We expect it to be a growing auxiliary business and allow our sales teams a more efficient allocation of time and effort with our existing and new vendors. As I reflect on my first full year as CEO at Wayside, I'm proud of the excellent progress we have made with the two strategic acquisitions and related integrations, while simultaneously advancing our strategic objectives throughout 2020. We grew our topline and managed margin throughout the pandemic, all the while rationalizing our balance sheet to provide more cash than we've ever had as a company. We remain committed to driving earnings growth and shareholder value. We're just getting started, and I look forward to accelerating our strong momentum throughout the year ahead. Before turning the call over to Mike Vesey, I want to reiterate my gratitude to our combined Climb Channel Solutions teams, Interwork, CDF, and tech extend teams for all your dedicated work and for expanding and supporting our vendor network during what has arguably been the most challenging year in recent history.

Thanks, Dale, and good morning, everyone. Before we kick things off, I'd like to remind everyone that our financial results include eight months of operating results from Interwork, as well as approximately two months of contribution from the acquisition of CDF, which closed on November 6, 2020. Net sales in the fourth quarter of 2020 increased 17% to $71.4 million compared to the year-ago quarter. The strong quarter reflects the impact of the two acquisitions completed this year, as well as growth within our existing vendor network during this period of seasonal strength in our business. Adjusted gross billings, a non-GAAP measure, increased 35% to $226.4 million in the fourth quarter of 2020 compared to the year-ago quarter. Gross profit in the fourth quarter of 2020 increased 34% to $10.5 million compared to $7.9 million in the year-ago quarter. The increase was primarily attributable to the aforementioned strong net sales growth generated during the quarter. With Interwork fully integrated and CDF already generating a meaningful contribution, we expect our acquisitions to continue contributing to our profitability improvements. SG&A expenses in the fourth quarter of 2020 were $7.7 million compared to $5.3 million in the year-ago quarter. As a percentage of net sales, SG&A was 10.8% compared to 8.8% in the year-ago quarter. The increase was primarily driven by acquisition-related costs associated with the CDF transaction, the additive expenses of the acquired businesses, and increased sales costs as we continue to invest in more personnel to drive future growth. As we grow, we expect SG&A margins to improve as we leverage the resources of our combined organizations. Net income in the fourth quarter of 2020 increased 25% to $2.5 million, or $0.58 per diluted share, compared to $2 million or $0.45 per diluted share in the year-ago quarter. Adjusted net income, which excludes non-recurring costs related to the unsolicited bid and the Interwork and CDF acquisitions, increased 37% to $2.9 million, or $0.69 per share, compared to $2.1 million or $0.48 per share in the year-ago quarter. In the fourth quarter of 2020, adjusted EBITDA increased 44% to $4.4 million compared to $3 million for the same period in 2019. The increase was primarily driven by the aforementioned growth in gross profit during the quarter resulting from the impact of the businesses we acquired during the year. Effective margin, which is defined as adjusted EBITDA as a percentage of gross profit, increased 280 basis points to 41.4% compared to 38.6% in the year-ago quarter. Cash and cash equivalents increased to $29.3 million at December 31, 2020, compared to $15 million at December 31, 2019. We remain debt-free as well. During the fourth quarter, we paid the full $17.4 million net cash purchase price, which excludes working capital and other adjustments for CDF. Even after this payout, our higher cash balance relative to the end of 2019 reflects sustained improvements in working capital resulting from the liquidity benefits of an early paid discount program implemented with one of our large customers during the second quarter. On February 23, 2021, the Board of Directors declared a quarterly dividend of $0.17 per share of common stock, payable on March 19, 2021, to shareholders of record on March 12, 2021. As we look ahead through 2021, our continued strong liquidity position provides us with flexibility to execute on our organic and acquisitive growth initiatives. This concludes my prepared remarks. Now, we'll open it up for questions.

Thank you. Our first question comes from an investor. Your line is now open. Thank you.

Hi, Dale. Can you hear me?

Yes, I hear you fine. Thanks, Howard.

Congratulations to you and your team on an impressive quarter and for laying the groundwork in 2020 with those two acquisitions and discontinuing the 'crazy AR financing program' with your vendor. My question focuses on the future. With Interwork and CDF successfully integrated and the expansion of your cloud-based distribution system, along with your market entry into Canada and Europe, you have exceeded $1 billion in annualized gross billings. What do you consider reasonable growth targets for 2021? While I know you don't provide guidance, could you share your thoughts on whether we're looking at 10% growth or 20% growth? Additionally, what is your view on the total addressable market in the emerging technology IP distribution sector, particularly in light of these two acquisitions and how they have broadened your market reach?

Yes, thanks, Howard. As for our growth outlook, you're correct. We aim to expand our team to over 270 members. We just wrapped up our virtual sales kickoff for 2021, which yielded good productivity. We're targeting growth of 8% to 12%. This isn't a formal guidance, but it's our goal. Regarding the addressable market, it's a bit complex. We focus on the major distributors, four of which represent over $100 billion. In North America, 60% of emerging vendors see the U.S. as their primary market, and these big distributors manage about 10% of their portfolios with emerging vendors. Therefore, if we consider a $100 billion market, roughly $10 billion represents the emerging segment we're competing in. Currently, we sit at $1 billion in net, with the next tier being $20 billion, leaving us with significant room to operate without overly disrupting the emerging market. We view the North American market as unified, especially after a seamless integration with Interwork, which we now consider part of Climb Channel Solutions. We've blended many teams into one cohesive group. Looking at our addressable market in Europe, we've grown from a satellite office to over a hundred staff in the UK, which is a vital area for our expansion. Overall, the addressable market is substantial, and we recognize the need for further research to clarify that it falls within the $5 billion to $15 billion range that we can tap into.

Great. If I could add just one quick follow up for Michael. With that 8% to 10%, somewhere in that range of growth, what do you have for metrics or what would you be happy with in terms of percentage bottom line? What's your target margins and target profitability? If you can give any color on that.

Yes, sure. I think the best way to look at it is because you do have the acquisitions to consider when you're trying to look at our historical results for 2020 and trying to look into the future here. The first thing I would do is start with this year as a baseline, and we acquired two businesses during the year. Interwork, we said it would contribute about $1 million in EBITDA per year once it's rationalized into our business, which it is now. So, in our current year results, we have eight months of Interwork. Next year, we'll pick up four if you want to look at it that way. We'll pick up say, $400,000 of EBITDA just because we're picking up a full year of Interwork fully integrated next year. On the CDF acquisition, their historical EBITDA is looking backward for their financial year that ended in June 2020, but they did about $2 million in EBITDA per year. In this year's results, we picked up close to two months; next year, we'll pick up another 10. So you’ll pick up another, let’s call it $1.6 million in EBITDA from that acquisition. So, between the two of them, we'll have $2 million of growth on the EBITDA line just by virtue of the fact that we have the acquired numbers built into next year. I think that's the starting point if you're trying to look at what the next year is going to be and model it out. The question you're asking on top of that is, well, what's the organic growth going to be in those businesses? I guess, organic growth plus synergies and cross opportunities between the businesses. I think that's where we get to the number that Dale was talking about, somewhere in the high-single digits to low-double digits on top of that.

Great. Well, thanks then and congrats again on a great quarter, really tying up a nice year for the transition and Wayside.

Thanks, Howard.

And there are no questions at this time, sir. Turning it back to you, Mr. Foster. Thank you.

Yes, again, thanks for everybody on the call today and keeping track of us as a company. I'm going to refer back to it's about the team that we're building as the engine of the company going forward. You'll see continued news from us as we go throughout this year and I'd like to thank all the employees, our Board of Directors, super supportive, and just the teams for during a challenging time, making it work. The biggest thing we're all facing is productivity right now and we got up and down throughout the summer and I think now we've got the optimism that we can soon get to traveling again and really start seeing people because the relationships should be face-to-face. But with that, again, thank you for the support of the company. I appreciate it and I'll turn it back to the operator.

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