Climb Global Solutions, Inc. Q1 FY2022 Earnings Call

Good morning, everyone, and thank you for participating in today's conference call to discuss Wayside Technology Group financial results for the First Quarter ended March 31st, 2022. Joining us today are Wayside's CEO, Mr. Dale Foster, the company's CFO, Mr. Drew Clark, and the company's Investor Relations Adviser, Mr. Sean Mansouri, with Elevate IR. By now, everyone should have access to the first-quarter 2022 earnings press release, which was issued yesterday afternoon at approximately 4:05 PM Eastern Time. The release is available in the Investor Relations section of Wayside Technology Group's website at waysidetechnology.com. This call will also be available for webcast replay on the company's website. Following the management's remarks, we will open the call for questions. I would now like to turn the call over to Mr. Mansouri for introductory comments.

Thank you. Before I introduce Dale, I'd like to remind listeners that certain comments made on 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 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 are being made 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 and adjusted EBITDA as supplemental measures of performance of our business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You will find reconciliation charts and other important information in the earnings press release and Form 8-K we furnished to the SEC yesterday. I will now like to turn the call over to Wayside’s CEO, Dale Foster.

Thank you, Sean, and good morning, everyone. During the first quarter, we continued to build up our strong momentum from the end of last year. We grew our top-line double digits in Q1, with our net income increasing to 79% and our Adjusted EBITDA was up over 60%, reflecting the inherent operating leverage in our business. These significant improvements are a testament to the execution of our core initiatives. More specifically, we're continuing to generate organic growth with our existing vendors and customers while adding new and disruptive vendors to our line card. This organic growth was most evident in our top 20 vendors, as we grew gross selling with this group by nearly 20% during the quarter to $171 million. This reflects the strength of our relationships with our most meaningful partners and it showcases both the value we are offering as well as the ability to evaluate and partner with the right companies that are bringing innovative products to the market. We've seen a significant increase in the sheer number of brands looking to partner with Climb this past quarter. While we remain committed to a purposefully limited line card, we did enter into a relatively high number of new partnership agreements in Q1. Climb evaluated over 50 new prospective brands and signed eight new agreements. One of the most notable partnerships we saw in Q1 was a partnership with Cato Networks. Cato Networks is a network security company that develops Secure Access Service Edge technology, which combines enterprise communication and security capabilities into a single cloud-based platform. While Cato Networks is a relatively new company established in 2015, they pioneered the convergence of networking and security into the cloud and created a highly differentiated offering that we know will be well-received by our bar and LSP partners. On the topic of the right partner, I'd like to highlight our sponsorship of the world record-breaking mountaineer Nims Purja through our client's subsidiary. Not only has Nims climbed all 14 of the world's highest peaks over 8,000 meters in just six months and six days, he was part of the first winter ascent of K2. His film 14 Peaks: Nothing Is Impossible is now out on Netflix, and he is the founder of the charitable Nimsdai Foundation. Nims embodies the characteristics that we hold true here at Wayside, that our employees, our partners, and our customers can not only achieve their goals, but they can push themselves to the next level of success. We thank Nims for leading by example, for reminding us to perform at our very highest level, ensuring the success in elevation of our partners. We can't wait for Nims to carry our flag to the top of Denali’s peak. Subsequent to the quarter end, we kicked off a collaboration project with Seagate Technology, a world leader in mass data storage infrastructure solutions, to expand its data protection and storage portfolio to the channel community through Seagate Lyve Mobile application. With simple deployment, next to limitless data capture and low-cost infrastructure investment, this combination will provide the channel community with the service-ready solution to enable the next generation of data movement, mobility, and migration practices to the market. Based on our M&A initiatives, we are continuing to evaluate opportunities in both the U.S. and abroad that will be accretive to our business and aligned with our strategic goals. We are in discussions with multiple targets that can enhance specific categories of our business, including geographic reach, vendor expansion, and service and solution offerings. Each potential target fits into one or more of these predefined buckets. With our strong and growing balance sheet, we have abundant room and financing capacity to execute on various forms and sizes of acquisitions in 2022.

Thank you, Dale, and good morning, everyone. As we review our financial results, I want to remind everyone that all of our comparisons and variance commentary refer to the prior year quarter, unless otherwise specified. While some might consider our first quarter of 2022 as a bit boring because it was a continuation of our team successfully executing on our business strategy. As reported in our earnings press release, adjusted gross billings, which we all realize is a non-GAAP measure, increased 13% to $238.7 million compared to $210.9 million in the year-ago quarter. This increase reflects continued organic growth from new and existing vendors. In addition, net sales in the first quarter of 2022 increased 13% to $71.3 million compared to $62.8 million in the prior year quarter. Gross profit in the first quarter of 2022 increased 11% to $12 million compared to $10.8 million for the three months ended March 31, 2021. Again, as Dale mentioned earlier, the increase in gross profit was driven primarily by organic growth from our top 20 vendors in both the U.S. and Canada, in addition to the onboarding of new vendors. Our gross profit as a percentage of adjusted gross billings was 5% versus 5.1%, which represented 16.8% of net sales compared to 17.3% in the prior year quarter. Q1 of 2021 included a large sale in our solutions business that had a significant impact on our gross profit and was unusual in nature. Excluding that transaction, gross profit as a percentage of both adjusted gross billings and net sales increased quarter-over-quarter. SG&A expenses in the first quarter were $8.6 million compared to $8.8 million. SG&A, as a percentage of adjusted gross billings, improved to 3.6% compared to 4.2% as we continue to emphasize lean operations and scale our infrastructure. Net income in the first quarter of 2022 increased 79% to $2.7 million or $0.61 per diluted share compared to $1.5 million or $0.35 per diluted share for the comparable period in 2021. Adjusted EBITDA in the first quarter increased 61% to $4.2 million compared to $2.6 million. Once again, this significant increase was entirely driven by organic growth from both new and existing vendors demonstrating our ability to leverage, scale, and deliver a higher percentage of our incremental gross profit to net income and adjusted EBITDA. Quickly turning to our balance sheet, cash and cash equivalents increased to $37 million as of March 31st, 2022, compared to $29.3 million as of December 31st, 2021. While working capital increased by $2.2 million during this first quarter period, the growth was primarily attributable to the timing of our collection and payment activities and not indicative of any type of business trend at this point. We continue to remain debt-free as of March 31, 2022, with no borrowings outstanding under either our $20 million or $8 million sterling credit facilities. On May 3rd, 2022, our Board of Directors declared a quarterly dividend of $0.17 per share of common stock, the dividend is payable on May 20th to shareholders of record as of May 16th. As we look ahead to the remainder of the year, our strong foundation continues to allow us to drive organic growth and meaningful operating leverage all while expanding our relationships with new vendor networks and customers across the globe. As Dale mentioned previously, we also remain diligent in our M&A strategy as we constantly evaluate targets that can enhance our geographic footprint in addition to our service and solution offerings. We look forward to delivering yet another year of strong organic and inorganic growth to our customers, partners, and shareholders alike. This now concludes our prepared remarks, and we'll open it up for questions from those participating in the call. Operator, I will turn the meeting back over to you.

Thank you. We will now start the question-and-answer session. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. We will pause for a moment as callers join the queue. Our first question comes from Bob Sales of LMK Capital Management. Please go ahead.

Hi. Good morning. Congratulations on the quarter. It was excellent and the progress with agreements in the M&A front. I did have a bookkeeping question. When you think about your receivables. And I'm going to ask this simply because it would jump out potentially to an analyst in terms of just pure DSOs. How do you think about your receivables relative to gross billings revenue and then the offset payables so we can think better about your management of that particular figure?

You want to take that Drew?

Yes. Bob, thanks for participating and thanks for the question. Our receivable portfolio tends to turn fairly quickly. Most of our customers are on a net 30 billing and payment cycle. We do have agings that will get into the 45 and 60-day bucket from time to time based on the cyclicality of some of the treasury management functions of our customers, especially the larger DMRs. But at the end of the day, our DSOs are probably sub 45. On the payable side, we normally have opportunities where we can garner rebates or early payment discounts with our vendors. So we will take advantage of those and there may be a slight mismatch between the receipt cycle and the payment cycle on the vendor side, but normally, fairly closely aligned on any particular month or quarter-end. I think a number of our large customers probably participated in a little bit of window dressing at the end of year-end, so we did have a bit of elongation, if you will, with some of those payment cycles, but normally fairly consistent month-to-month, quarter-to-quarter. And the cash flow, as you know, is very strong in any particular quarter.

I don't see any reason that those cycles will change dramatically in any particular direction. As if you turn the model a little bit to the cash flow and working capital requirements of the business, we do have that excess cash and we're diligently looking to deploy that into some acquisition activity that hopefully we can be sharing with the market in the not-too-distant future, but nothing definitive at this point. I will turn it back to you, Bob, if you have a follow-up question.

Yeah.

Real quick let me jump over. Real quick on the vendor's side of things we look at the contracts that we have with each one of the vendors, and we follow those stuff. But because of our relationships are so tight with these emerging vendors that are getting to market then they are very flexible with their terms in those contracts and then there's the terms per opportunity. So we're in lockstep with them as far as our receivables go, and if there's extended terms, if we pass them on, but, yeah, it's important to us. It's each week as our executive team, we meet to talk about receivables because it's a big part of the company.

I just wanted to note that your receivables were down sequentially and that comparing gross billings to GAAP revenue can distort the actual metric. I'm bringing this up because you're performing incredibly well financially, and I want to make sure you have the chance in this call to provide some context. This way, it prevents anyone from nitpicking later since your cash flow looks excellent.

Yeah.

The second thing I want to ask about was, I'm sorry, did you want to respond to that? I just missed it.

No, I agree.

What are your thoughts on the eight new agreements and the 50 being looked at? Is this more about a deliberate expansion of the number of names you want to work with at this point, or is it about casting a wider net to identify which vendors could become strong players in the top 20 over time?

For this past quarter, it's really a bit about timing. With some of the new vendors hitting us at that period of time, and then we'd look at them pretty deeply, and we take our time vetting them. And it just happened to be a timing thing where we were looking and seeing quite a few of them come at us, we've got a couple more in the pipe that are sizable and we wouldn't even entertain them as we're trying to onboard these eight if it wasn't the important to the management and also the sales teams. We get pretty much everybody involved when we look at a new vendor to say, hey, does this fit? Is this right in our portfolio? Where does it fit into our six segments of technology, and then we sign from there. I'd like to think, and we haven't been able to verify it, I'd like to think this is because we're becoming more prevalent in the marketplace and a little disruptive to our competitors that we're getting seen by more vendors and emerging who's coming up, instead of us going after them. So we'll move that out over the next year and probably the continued process.

Okay, I'll continue. I have a sense that there may not be much to share since I'm the first in line. Regarding mergers and acquisitions, should we anticipate ongoing deals of a similar size? You mentioned the complementary aspects, but can we expect the same scale of acquisitions, or might you consider larger opportunities?

We have been examining significant transformative opportunities for the company, while still considering some smaller options. I cannot share too many details, but our acquisitions range from minor tuck-ins to transformative opportunities in specific regions, aligned with our three acquisition strategies. Additionally, we are looking at vendors whose offerings could enhance our presence across various regions. We have made some acquisitions aimed at this, which have become micro-sized. Unfortunately, we haven't effectively penetrated the UK or established a strong presence between the UK and the U.S. as we had hoped. However, by the end of the year, you can expect to see these vendors gradually entering other regions through our press releases. We believe if we are successful in one region, we should be successful in others too, which is a point of frustration we aim to address in the coming months.

Okay, and the last question. What are you seeing with the challenges in Europe that we're hearing about, some of the supply chain issues, and I guess at this point, just the nervousness of the financial markets. Are you seeing any signs though that buyers are getting a little bit slower in making decisions or more cautious in spending?

So two things, I was on a call yesterday with Supermicro. Supermicro is a hardware supplier, they're like a Tier 2 for anybody that wants to buy servers that are in HP, IBM, or Lenovo. And that's the issue, it's the hardware piece. We're 80% software as far as our portfolio. The only thing that slows down with us would be if there's a big implementation going out that has hardware that goes with it, that our software might have to delay the buying cycle until they get everything ready to go on ship. Other than that, we are in the two hotter spaces. We are in security which everybody needs and everybody claims that they have a security product, I don't care if you're data storage, you still say that you have security to watch to make sure you are backing a brand somewhere. So that's the hotspot. And then the other one is data center. When I say data center, people are migrating, whether they're migrating to the cloud, they're using a hybrid cloud setup, or they're trying to do requests back off the cloud because some of their workloads didn't work well enough in the cloud. So we're in the two good spaces. We haven't seen that concern with the interest rates in the market slowing down in some spaces. We're going to watch our receivables and as we give credit to even more costing, we're used to this cyclical nature over the last 20-something years of our careers.

Got it. Okay, thanks. Congratulations. And I'll pass the time.

Thanks, Bob.

Our next question comes from Howard Root, a private investor. Please go ahead.

Thanks, guys, and congratulations on another great quarter. I've got two questions, one for Drew and then one for Dale. For Drew, I do everything based on adjusted gross billings which I think you guys do too, because the determination of whether it's a sale or not just in the accounting division. And then based on that I look at the gross profit and then the SG&A and your gross profit, thanks for the comment on what happened there from last year being a little aberration at the high, but Q4 to Q1 I think went from around 4.8% to 5% sequentially. Do you see that being, that 5% gross profit based on adjusted gross billings as being your new normal, is it going to creep up from that? And then on the SG&A side too, the decrease of 200 grand from last year to this year surprised me. Great job on that on you're always have a great on cost management, but do you see that, $8.6 million, do you see that going up? What do you see on trends on the SG&A line and on the gross profit line?

Yes, so thanks, Howard, and good questions. On the gross profit line, if I were to provide directional guidance, if you will, I would say that that's a steady-state for us, and we can move the needle slightly as Dale referenced when we bring on new vendors they tend to build over a period of time. They may have a more attractive economic value to us in terms of the contract that we negotiate and how we deliver and go-to-market on their behalf. I would say that 5% is a pretty good number on our solution business. If that continues to grow with our Microsoft CSP relationship that we can incrementally move that in the correct ascending direction. I don't know how much stronger we can get above 5% to be honest in the next year, but that's something we think about every day and work on with our vendor relationships and how do we manage early pay discounts and rebates and all the things that go along with both on our customer side and our vendor side. Again, directionally I'd say that's a good trend for us and we expect to maintain that at least through the balance of this year. On the SG&A side, to Dale's credit and the sales and marketing team's credit, last year we really evaluated how do we compensate our sales folks, and we wanted to make sure that we are incentivizing them properly, but also ensuring that we can create the right metrics to drive the business. So Dale's created a really good infrastructure and organization with our sales teams that enable us to further leverage either brand sales specialists and products or territories, so we're getting more efficient and therefore able to drive more adjusted gross billings with about the same type of headcount. So I think we'll continue to see SG&A improve incrementally, not significantly, but that will continue to improve as we move forward into the balance of 2022. Dale, if you have any thoughts or comments.

Thanks, Drew. Regarding margins, we often discuss our focus on margin expansion and the importance of providing additional value. When aiming to expand margins, we receive a baseline margin for picking, packing, and shipping, but we need to consider what added value we bring to the market. We've previously mentioned enhancing our offerings with more solutions, services, and technical support. Internally, it's crucial for us to figure out how to scale this approach across the business. As we partner with vendors, we explore ways to deliver more value and achieve higher margins. We're actively working on a few initiatives that we plan to announce in the upcoming six months.

Okay, and Drew, when you say improved SG&A, I mean you're not going to drive SG&A down on an absolute number. I assume that's going to tick up. It's just on a percentage number. It's not going to increase as high as your adjusted gross is going up, is that what you're saying?

Correct, yes. On a gross basis, but on directional basis as a percentage of adjusted gross billings, yes.

Okay, great. My question is for Dale. Looking back, I believe you've led the company for over three years now, and since you started, you've focused on your top 20 accounts, rather than accepting every opportunity. You've done a fantastic job, and the results demonstrate that, with a billion dollars in adjusted gross billings and a double-digit growth of 13%. As your CFO mentioned, it's been another uneventful quarter, which raises the question about your future visibility and the potential to provide guidance. It appears the company is at a stage where you can discuss plans to reach two billion or three billion in adjusted gross billings, as well as trends for the next four quarters. This would enable investors to model the business more effectively and understand what's happening. I encourage you to address this in the next call. I'm not asking for specific figures now, but perhaps you could share some insights since you've focused on your top 20 accounts and expanded geographically. Without considering acquisitions, do you expect this double-digit revenue or adjusted gross billing growth to continue? Is a target of 15% or 20% realistic? Is this a billion-dollar adjusted gross billing year heading towards 1.2 billion? Where do you see it going, and when can we expect guidance now that the business appears to be in a strong position?

On the guidance front, we've held our Board of Directors meeting earlier this week, where the topic was discussed extensively thanks to our diverse board. This is becoming an important point of conversation, and I expect that we will talk about it more specifically in the next two quarters. Regarding our growth, we're focusing on targeting more Tier 2 and Tier 3 vendors, as we have a wide net of potential clients. I'm looking to add more products to our group of resellers, and for that, we need vendors who can provide $4 million to $5 million in gross sales annually, with the potential to increase that to $10 to $20 million, which would be transformative for the company. While we don’t provide specific guidance, we aim for a growth rate in the low double digits internally. However, we do have some internal improvements to make, including starting a new ERP implementation led by Drew and his team a couple of months ago, which should be transformative for the company. We need to ensure that our SG&A remains at appropriate levels to support our scaling efforts. I believe we are not yet at the point of scaling or a significant inflection point, but we can sense it approaching. We still must align our systems to better onboard vendors, customers, and to transact more efficiently. While our systems have served us well over the years, they are not suited for the size we currently are and the size we aspire to achieve.

What do you consider to be transformative growth in terms of size? This market is vast, but your segment is on the smaller side. Is there potential for this to be a $5 billion adjusted gross billings company, excluding acquisitions? Do you envision that within a five-year plan, or do you think you'll need to make acquisitions to sustain growth at this rate?

It's a mix of strategies. We aim to expand because we believe in our model in the States and can extend that into other regions. The available targets in the U.S. have been exhausted, so we're looking internationally. However, achieving $5 billion in five years is within reach. We recognize that we can't solely rely on acquisitions to get there; it will require organic growth and exploring adjacent markets as well. When you consider the smallest of the major IT distributors, Aero, which has $30 billion in revenue, there's a significant gap between us and them, with others like Ingram and Tech Data’s Synnex surpassing $40 and $50 billion. While there’s plenty of opportunity, we are not solely focused on adjusting gross billing; we aim to boost sales and enhance margins where possible. This won't necessarily be reflected in an overall increase but will be evident in specific areas where we deepen our relationships with customers. Our goal is to cultivate long-term clients, not just individual transactions, and that philosophy will remain central to our approach moving forward.

Did that lose you Howard? Yeah. You cut out there. Sorry about that but I think I caught most of it and I always listen to replays if there's anything I missed. Congratulations on a great quarter, and I just encourage you next call, spend a couple of minutes talking about the long-term, you know, the company and the guidance kind of going forward as much as you can.

You got it.

Howard, as Dale referenced, we did a deep dive with our board, sort of a strategic session and you must have been the fly on the wall because we absolutely will be starting to share some, I'd hate to say guidance, but sort of directional trends that we're looking forward to over the next two to three years, so at least you all will have a sense of some guideposts, but we won't be uber specific but we absolutely will provide some directional thoughts and guidance to the market after our Q2 earnings call.

Thanks, guys. Great quarter.

Thank you.

Our next question comes from Bruce Lindermann, a private investor. Please go ahead.

Hi, my wife and I have been shareholders for over 20 years. We want to thank you for the excellent job you've done with this company since you've taken over. Our question is about liquidity, which is quite problematic. Sometimes it can be as low as $2 or $3 during the trading day. Even though splitting a stock at these levels isn't common, could it be possible to consider a stock split to increase the number of shares in the market and improve liquidity? This could help attract investors, especially institutions, given their need for a substantial number of shares and liquidity. What are your thoughts on this?

Thanks, Bruce. We discuss this in our meetings regarding liquidity, and while we haven't formulated a definitive plan moving forward, it is a topic of conversation. We're not ignoring it; we actively consider various options. We believe that our stock offers good value and we need to enhance our efforts in this area. Personally, our focus is on driving the business, and this was a key topic in our strategic meeting with the Board this week. We constantly consider what is important to our shareholders, including guidance and liquidity, which is discussed in almost every meeting. We understand your concerns, but we don’t have a solution to provide at this moment.

Thank you all for everything. You've done a great job. Thank you.

You got it. Thanks, Bruce.

This concludes the question-and-answer session. I would like to turn the conference back over Mr. Foster for any closing remarks.

Thank you, Operator. I'd like to close this call by thanking all of our stakeholders and especially thank you to our growing global employee count. We just have a great team. Wherever we go, we are making a difference. You'll see more and more of our company's names out there. Climb is very prevalent and our new GrayMatter transformation in the U.S. is getting more and more traction, so you'll see that. Thank you to all and all of our stakeholders.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.