Climb Global Solutions, Inc. Q2 FY2022 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 Second Quarter ended June 30, 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 second quarter 2022 earnings press release, which was issued yesterday afternoon at approximately 4:05 P.M. 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 management remarks, we'll open the call for your questions. I'd 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, adjusted EBITDA, and effective margins, 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'll find reconciliation charts and other important information in the earnings press release and Form 8-K we furnished to the SEC yesterday. I would now like to turn the call over to Wayside's CEO, Dale Foster.

Thank you, Sean and good morning, everyone. We continue to execute on our core initiatives during the second quarter, generating organic growth with our existing vendors and customers while adding new emerging vendors to our line card. This resulted in another strong quarter of profitability with gross profit in double digits and a significant increase in net income and adjusted EBITDA compared to the prior year. As I mentioned on past calls, we are committed to a limited and focused line card in order to partner with the most innovative technology brands in the market. Out of our 31 brands we evaluated this past quarter, we only signed agreements with six of them, including two I'd like to highlight, Hammerspace and Mirantis. Hammerspace is a market leader in the global data access marketplace and delivered the world's first and only solution to connect global users with their data and applications. Mirantis is an open source cloud computing software company with a host of cloud management products such as Mirantis Cloud Container and Kubernetes Engine. We look forward to growing our partnerships with these innovative technologies and service providers as we expand their reach through the channel. Subsequent to the quarter end, last week, we were designated as a preferred distributor in North America for HUMAN's enterprise defense platform, which enables resellers to bolster their security staff. Over 75% of all digital attacks are believed to be bot-based, and bots and cyber criminals are becoming increasingly sophisticated every year. Today, HUMAN verifies the humanity of more than 15 trillion digital interactions per week, offering enterprises a platform with exceptional visibility into fraud activity across the Internet. This partnership brings even more depth to our cybersecurity vertical, which has been one of the fastest consistently growing segments of our vendor network. While it has been another productive few months of adding to our line card, we have also continued to make headway in driving broader market awareness of our client business. As mentioned on our last conference call, earlier this year, we sponsored Nims Purja during his ascent of Denali's peak. And just last week, we announced the partnership with one of our cybersecurity vendors Acronis to be the primary sponsor of Hendrick Motorsports. Our sponsorship covers title contender William Byron to two NASCAR races this season where we received prominent branding alongside our vendor Acronis. Also during the quarter, we expanded our leadership team with the promotion of Tim Popovich to President of Climb, North America. Tim is a true representation of the culture here at Wayside, where we place a strong emphasis on working hard and continuing to learn and strive for the next level of success. With over 18 years of service at Climb and even more in the IT channel, Tim has truly climbed the ladder of our company and the industry. He was hired in 2003 as a sales associate and has consistently risen through the ranks over the years. I couldn't think of a more competent professional to take on this role. The Board and our colleagues at the company share my enthusiasm for his promotion. Before I turn it over to Andrew, I want to take a moment to recognize another key member of our team that unexpectedly passed away last week, Ross Crane. Ross has been a Board Director since 2019 and was appointed Chair of the Audit Committee in 2021. We are deeply saddened by the news. Ross was an experienced financial executive who provided sage counsel to Drew and our entire team. His advice and wisdom as a Board member and colleague will never be forgotten. Our thoughts are with his family during this difficult time. I will now turn the call over to Drew to take you through the financial results.

Thank you, Dale, and good morning, everyone. No easy segue here, and our condolences go out to Ross's wife Terry and everyone that was close to Ross, especially our Board member, Andrew Bryant, who spent many years in the industry trenches working side by side with Ross. As we review our financial results, I want to remind everyone that all comparisons and variances commentary refer to the prior year quarter, unless otherwise specified. Q2 results were highlighted by another period of improved profitability as we produced our fifth consecutive quarter of period-over-period growth in profitability. As reported in our earnings press release, adjusted gross billings, which is a non-GAAP measure, increased $6.7 million or 3% to $241.8 million compared to $235.1 million in the year-ago quarter. The increase reflects continued organic growth from new and existing vendors. In addition, net sales in the second quarter of 2022 were $67.9 million compared to $75.4 million. This slight decrease is attributed to record net sales with one of our vendors in the year-ago period. Excluding that vendor, the company grew net sales by nearly 10% with our remaining top 20 partners. Gross profit in the second quarter increased 14% to $12.5 million compared to $11 million for the three months ended June 30, 2021. The increase in gross profit was driven by organic growth with our top 20 vendors as well as a number of customers not taking advantage of early pay discounts compared to the year-ago period. Our gross profit as a percentage of adjusted gross billings was 5.2% versus 4.7%, and as a percentage of net sales was 18.4% compared to 14.6% in the year-ago quarter. SG&A expenses in the second quarter were $8.4 million compared to $8.5 million for the same period in 2021. SG&A as a percentage of adjusted gross billings was 3.5% compared to 3.6%, again, demonstrating our commitment and ability to leverage our infrastructure and human capital as we continue to grow the business. Net income in the second quarter of 2022 increased 56% to $2.8 million or $0.63 per diluted share compared to $1.8 million or $0.41 per diluted share for the comparable period in 2021. Adjusted EBITDA in the second quarter increased 27% to $4.5 million compared to $3.5 million in the year-ago quarter. This increase was driven entirely 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. Turning to our balance sheet. Cash and cash equivalents remained level at $29.3 million as of June 30, 2022 compared to the prior year-end while working capital increased by $5.4 million during this period. In the second quarter, we entered into a term facility to finance our ERP implementation, which is reflected on the balance sheet as a combination of current and noncurrent debt totaling approximately $2.1 million as of June 30, 2022. With no borrowings outstanding under either our $20 million or GBP 8 million credit facilities. On August 02, 2022, our Board of Directors declared a quarterly dividend of $0.17 per share of common stock. The dividend is payable on August 19, 2022, to shareholders of record as of August 15, 2022. Looking ahead to Q3 and beyond, we see abundant growth opportunities to capture through the continued execution of our core initiatives, both over the short and long term. We are looking forward to introducing a multiyear directional outlook for the company that highlights our targeted growth and profitability as we continue to scale. We originally intended to introduce this longer-term outlook on today's conference call. However, given the unexpected passing of Ross and the resulting vacancy on the Board and Audit Committee, we felt it was best to defer it for now. To echo Dale's comments, Ross's steady and thoughtful insight and leadership will truly be missed by all. This concludes our prepared remarks. And we'll now open it up for questions from those participating in the call. Operator, back to you. Thank you.

Thank you. Our first question comes from Howard Roupe, a private investor. Your line is open.

Congratulations, guys on the quarter. Can you hear me okay?

Sure can, Howard. Thanks.

Sure, and I want to express my condolences on the passing of your Director. That's really sad news. I have two questions for Drew. First, the accounts payable decreased by about $12 million this quarter. Is there a specific reason for that, and is this likely to continue in the future?

No, just the normal cycle of our treasury management and cash management function. So we had a vendor that requested from us an earlier payment to meet one of their internal requirements. So we were happy to accommodate that because we have plenty of working capital and cash on the balance sheet, and there was some additional margin associated with that payment. So that may have influenced the net balance of accounts payable and working capital at the end of the quarter, but nothing that would be indicative that will have much of a variance in our kind of working capital levels or cash position until we are able to deploy that into some acquisitions.

Okay. And similar on the term loan, can you give the reasoning for the term loan in the quarter, the borrowings?

Yes, as mentioned, we are currently implementing the selected ERP system. We considered different funding options, including cash and a variable rate revolver. Ultimately, we chose to secure four-year term financing at an attractive rate of 3.73%, taking into account the outlook for rising interest rates and inflationary trends. This was the reasoning behind our decision.

And do you see that continuing to be increasing or was it staying the same or what do you see going forward on that?

Well, that's the balance we amortize over a 48-month period. So that will continue to amortize off as we pay down principal and the interest component. And I don't think we'll put on any other intermediate type of financing or any other capital projects because that's really the only CAPEX we have in the foreseeable future other than acquisitions.

Okay. Dale, considering the circumstances, I understand there might not be a clear vision presented today. However, could you elaborate on what you foresee moving forward? You know, your company is consistently reliable, and I appreciate that. You're meeting expectations, growing your profits, and maintaining focus, which is commendable. Will this growth trend continue in a straightforward manner? Could you share some insights on what to expect going ahead? For instance, with gross margins improving, adjusted gross billings increasing, and your product offerings being selective yet successful and profitable, is this growth trajectory likely to remain linear?

It is to a point, Howard, and that is we're going to do the same things we did in 2020. We acquired a couple of companies and got them integrated. I've talked about it probably too much to the teams and the Board about having the right culture fit when we acquire a company. And the two that we chose, one, we got to spend a lot of time with them in Canada, not as much time with our CDF Group in the UK. And during COVID, we've made that up over this past nine months and had multiple trips, multiple team members out there. And we do have a great team, and we could say, hey, maybe we just got lucky with picking them. I think some of it had to do with the ownership that they had that we got along with through the whole acquisition process. So if you take a look at our core business, we're going to do the same thing. We are going to continue to add vendors. We're going to continue to jettison the ones that are nonperformers, and we'll put them into our group called Climb Elevate so that when they get to the right stage in their lifecycle, if it fits for us, we'll bring them back into the core and launch with them. Other than that, you'll see our acquisitions that we're looking at that will plug on and get into the same flow that we do with Interwork and CDF and then you'll see that jump up. And then our goal is the same thing. When you say we're boring, just another linear growth with that add-on and continue to build that in regions that we think we can have the biggest impact and also provide the best value for our vendors, right, because our vendors want reach, and they like the reach that we have in the regions, so why not have the same kind of region in additional regions that we're in right now today?

Great, thanks. And congratulations on another great boring quarter.

Thanks, Howard, appreciate it.

Thank you. I'm not showing any further questions in the queue. I'd like to turn the call back over to Dale for any closing remarks.

Thank you, Albert. I appreciate our shareholders, Board members, and employees. We have many positive developments ahead. We've discussed the possibility of a recession in our internal meetings and are planning accordingly. As a software delivery company, we expect to avoid the logistics issues that have affected many over the past couple of years. We'll continue our focus on integrations, as Howard mentioned, and maintain a steady approach. ERP is crucial for us as we work to unify our systems and simplify progress tracking internally. Thank you for your continued support.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.