Climb Global Solutions, Inc. Q2 FY2024 Earnings Call

Good morning, everyone, and thank you for joining today's conference call to discuss Climb Global Solutions' financial results for the second quarter that ended on June 30, 2024. With us today are Climb's CEO, Mr. Dale Foster; CFO, Mr. Drew Clark; and Investor Relations Advisor, Mr. Sean Mansouri from Elevate IR. You should all have access to the second quarter 2024 earnings press release that was issued yesterday afternoon around 4:05 p.m. Eastern Time. The release is available in the Investor Relations section of Climb Global Solutions' website. This call will also be accessible for replay on the company's website. After management's remarks, we will open the call for questions. I will now hand it 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, adjusted net income and EPS and effective margin as supplemental measures of our 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'll now turn the call over to Climb's CEO, Dale Foster.

Thank you, Sean, and good morning, everyone. Our teams produced another great quarter in Q2 as we increased adjusted gross billings, net income and adjusted EBITDA year-over-year. These results underscore our team's continued execution of our core strategy. We continue to grow organically by deepening relationships with existing partners, signing new emerging technology vendors to our line card and delivering on our acquisition goals. As we have often emphasized, our commitment to a focused vendor line card enables us to partner with the most innovative technology companies in the market. During the second quarter, we evaluated 31 new brands and signed agreements with only three of them. Let me briefly highlight a couple of these wins. First, we launched a partnership with Automox, a leading cloud native IoT automation endpoint management solution for our North American partners. With the addition of Automox, Climb can provide customers the capabilities to save time, eliminate risk and automate the patching configuration and control of all Windows, macOS and Linux endpoint systems with one modern IT platform. Next, we finalized our agreement with Flashpoint, a globally trusted leader in risk intelligence that helps organizations protect their most critical assets, infrastructure, and stakeholders from security risks such as cyber attacks, ransomware, fraud, and physical threats. We are excited to collaborate with each of these vendors and bring their products to market, building on a mutually beneficial relationship along the way. Last month, we announced an expansion of our GSA IT-70 contract with the addition of Wasabi Technologies, a market leader in hot cloud storage. Wasabi delivers low-cost, high-performance secure cloud objective storage for customers who require an in-depth defense approach to data protection. Climb will also offer Wasabi Surveillance Cloud on our GSA contract, which enables organizations to cost effectively scale and protect video surveillance footage in the cloud. Wasabi's layered approach to data security ensures customer data is protected by physical and logical elements that meet or exceed critical compliance requirements. We're pleased to offer our partners in the public sector this innovative solution and look forward to adding further depth to our GSA contract in the future. Now, to some exciting news. Last week, we closed the acquisition of Wisconsin-based IT distributor Douglas Stewart Software or DSS, adding complementary scale and expertise to our North American operations. This acquisition brings more than 20 new vendor partners to Climb, including Adobe, GoGuardian, and Incident IQ. DSS is a proven leader in the education technology channel and provides services to more than 500 value-added resellers and 250 campus stores across North America in both K-12 and higher education markets. We're thrilled to welcome Chuck Hulan and his team to the Climb family and look forward to unlocking synergies and cross-selling opportunities as we integrate DSS into our platforms in the coming months. As I have stated before, the culture and go-to-market strategies we have created at Climb set us apart in the market. Getting to know Chuck over the past 18 months solidifies this belief as Chuck and his team have built an excellent company with similar core values and go-to-market plans as we do here at Climb. I am also pleased to announce last month that we went live with our ERP system. This new platform will significantly enhance our operations by providing better access to real-time data across finance, sales, and other reporting functions. The implementation of the new system represents a major step forward in our ability to drive operational efficiencies, improve decision-making, and support our continued growth across our global operations, particularly with new acquisitions that we will onboard to our platform. I would like to personally thank Vito Legrottaglie, our CTO, and his entire team that took on this project from the concept phase to a working system, and this will only enhance our competitiveness in the market. As we enter the back half of the year, our solid foundation will enable us to continue driving strong organic growth, while further improving operating leverage through the recent implementation of our ERP system. As we move into 2025, we anticipate the increased amortization expense associated with ERP will be offset through planned operating synergies in our platform. With a strong balance sheet and a robust pipeline of M&A targets, we can be patient and selective as we pursue acquisitions that will not only bolster our service and solution offerings but also align with our culture and strategic goals. The combination of these initiatives will enable us to deliver on both organic and inorganic growth objectives in 2024 and beyond. With that, I will turn the call over to our CFO, Drew Clark, to go through our financial results. Drew?

Thank you, Dale. Good morning, everyone. While our second quarter provided some excitement for our company and team members, it was anything but boring. A quick reminder as we review the financial results for our second quarter, all comparisons and variance commentary refer to the prior year quarter unless otherwise specified. As reported in our earnings press release, adjusted gross billings or AGB increased 31% to $359.8 million, compared to $274.7 million in the year ago quarter. Net sales in the second quarter of 2024 increased 13% to $92.1 million, compared to $81.7 million, which reflects organic growth from new and existing vendors as well as a contribution from our acquisition of Data Solutions in October of last year. At the recommendation of our team at Elevate IR who suggested, we will call out Data Solutions versus abbreviating to DS in order to avoid any confusion with our recent acquisition of DSS. So excluding Data Solutions, AGB increased by $53.5 million or 19.5% for the quarter on an organic basis. Data Solutions generated $31.6 million in AGB for the quarter, which was $3 million or 10.6% greater than the prior year's quarter, both strong indicators of our dual approach to efficiently deploy shareholder capital in our existing business, as well as new acquisitions. As Dale and I frequently state, we focus on AGB as the true metric of our top line growth as the calculation of net sales is influenced by product mix and the respective adjustment to convert AGB to net sales for financial reporting purposes under GAAP. In the second quarter, we had an increase in the sale of security, maintenance, and cloud products, which are recorded net of related cost of sales, and therefore, leads to a larger adjustment from AGB to net sales. Data Solutions and our Solutions business generate a higher adjustment to AGB to net sales. Gross profit or GP in the second quarter increased 36% to $18.6 million, compared to $13.7 million. Again, the increase was driven by organic growth from new and existing vendors in both North America and Europe, as well as the contribution from Data Solutions. Excluding Data Solutions, GP increased by $2.4 million or 17.8% for the quarter. Data Solutions generated $2.4 million in GP for the quarter, a significant increase over the prior year's quarter. Gross profit as a percentage of AGB increased to 5.2% compared to 5%. Moving to the expense side of the income statement, SG&A expenses in the second quarter were $13 million compared to $11.6 million for the same period in 2023. Data Solutions represented most of the increase at $1.3 million. SG&A as a percentage of AGB decreased to 3.6% compared to 4.2% in the year ago period, reflecting the inherent operating leverage in our business model which will further improve with the addition of DSS and global implementation of our ERP. Net income in the second quarter of 2024 increased more than 2x to $3.4 million or $0.75 per diluted share compared to $1.4 million or $0.31 per diluted share for the comparable period in 2023. Adjusted net income increased 19% to $3.8 million or $0.83 per diluted share compared to $3.2 million or $0.72 per diluted share for the year ago period. The company's earnings per diluted share in the second quarter of 2024 were negatively impacted by $0.03 in FX compared to the prior year quarter. Adjusted EBITDA in the second quarter increased 48% to $6.9 million compared to $4.7 million in the prior period. The increase was primarily driven by the aforementioned organic growth from both new and existing vendors as well as the contribution from Data Solutions. Adjusted EBITDA as a percentage of gross profit or effective margin increased 310 basis points to 37.3% compared to 34.2% in the year-ago period. Turning to our balance sheet, cash and cash equivalents were $48.4 million as of June 30, 2024, compared to $36.3 million on December 31, 2023, while working capital increased by $2.8 million during this period. The increase in cash was primarily attributed to Data Solutions' cash balance as well as the timing of receivable collections and vendor payments. As of June 30, 2024, we had $1.0 million of outstanding debt with no borrowings outstanding under our $50 million revolving credit facility with JPMorgan Chase. In addition, we terminated the invoice discounting facility that Data Solutions utilized as a short-term financing vehicle for working capital. As of August 6, consistent with prior quarters, our Board of Directors declared a quarterly dividend of $0.17 per share of common stock, to shareholders of record as of August 16 and payable on August 22, 2024. Building on Dale's earlier comments, we plan to continue driving organic growth with existing partners while adding new innovative vendors to our line card. We will also remain diligent in our M&A approach, as we evaluate targets that will be accretive to earnings and fit our strategic direction. DSS is another example of delivering on our commitment to being good stewards of the capital we've been entrusted with. As noted in our press release, DSS generated $5.3 million in EBITDA for the trailing 12 months ended June 30. Our expectation is to expand DSS' top line and implement operating expense synergies in the first three to four months post-closing and therefore grow EBITDA. We believe these initiatives coupled with our robust liquidity position will enable us to deliver strong growth and profitability in the second half of 2024 into 2025 and beyond. This concludes our prepared remarks. We'll now open it up for questions from those participating in the call. Operator back to you.

We will take our first question from Vincent Colicchio with Barrington Research. Please go ahead.

Yeah, Dale. Good morning.

Good morning.

Starting off, it sounds like security and data centers continue to be the core drivers of growth. Am I correct in that? And is that what you expect for the second half of the year?

You are correct, Vince. I just actually yesterday came in from a Black Hat event in Vegas which is growing very quickly as a conference. RSA is the premier one, but this one is correct, we have 23 of our security vendors presenting there. And then the data center there's some lag there just because some of the hardware, but not on our side because we're very focused. They get the hardware from different places, but it's really on the software side that we're delivering on.

And was growth broad-based? Did your top 20 vendors grow in line with the overall business?

Yes. We experienced growth across all of our regions. We have defined territories in the US and teams that can sell any products in our lineup and our top 100. In Q2, we saw growth in every territory and all of our direct marketers, like CDW and SHI, except for one, which remained mostly flat. Other than that, we had growth consistently.

And then on the DSS acquisition, how long do you think it should take before you generate cross-selling synergies here?

Yes, the process will be relatively quick. While we didn’t completely sell out, Adobe has a significant presence in the K-12 and higher education markets. We've carefully analyzed potential targets and developed a strong understanding of them alongside Chuck and his team. Our internal analysis shows that we have been selling to approximately 15,000 unique educational locations, even though we don’t specifically label it as a vertical like DSS does. This indicates a strong opportunity for cross-selling. Additionally, many smaller distributors we've acquired are seeking vendors that integrate well into their ecosystems, and we found several options that meet those needs. A lot of this will focus on cloud services, including storage and backup solutions.

And then on the Data Solutions side, did you achieve your cross-selling synergies in the quarter?

Yes, two things there. One is the cross-selling synergies and the other side is getting our teams aligned between the two groups. And we have different heads of both our original acquisition with CDF and Spinnaker and now Data Solutions, those three we have different team members running different aspects of the business. So as far as the integration of the teams, that is all done. And then what we're finding is in the Irish market, it's easy to sign vendors and then the tough thing is to get them to expand to the UK market. So we're seeing some of that. Same thing with our vendors moving over from the US, I can name two or three of them that actually have moved over. We have had some success with them. So, it will just continue to be an organic flow. Most of the time, it's from the US to the UK. But like I mentioned in Q1, we've had a couple that have come back this way that we actually signed in the US after they were signed in the UK or Ireland.

Okay. Thanks for that and a nice quarter. I’ll go back in the queue.

Thanks, Vince.

Our next question will come from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. Did you mention, Dale that you've been in discussions for 18 months with Douglas Stewart?

Yes. Regarding our prospects, we discussed the targets that are available and the excitement we feel about our organic growth related to the number of vendors we're evaluating. This quarter, we assessed over 30 vendors, and our CMO Charles has reviewed 210 vendors in the past eight months. There’s a significant number emerging, especially among the acquisition targets, most of which are located overseas, starting with Western Europe. Drew introduced us to one company, and as we engaged with them, I recognized that Douglas Stewart is an excellent fit for us. They specialize in the education sector, which aligns with our focus on emerging technology. While Adobe itself may not be considered new, there are numerous products in various categories that we believe we can market alongside Adobe to create a more comprehensive industry coverage. This is where our excitement lies, and we've been in discussions for quite some time now.

Thank you for that. And would you please detail the earn-out tied with this acquisition?

The earn-out structure includes two main components. The first component is a gross profit margin target. We analyzed a forecast and budget, increasing it based on the growth we anticipated DSS would achieve. They can earn up to 85%, 100%, or 115% of the earn-out if they meet those gross profit margin targets. The second component involves increasing EBIT, which refers to cash above EBITDA over the 12-month period, and this is also part of the earn-out.

Thanks, Drew. And what's the total dollar amount that that earn-out could be? What's the maximum?

So if you look at that, the maximum target would be about $4.2 million, I believe.

Okay. Thank you. Congratulations on the transaction. Relative to the ERP implementation, was that in the US only? Or was that across all geographies?

I'll let Drew discuss that, but our team is currently in the UK for our second launch, with another one on the way. Go ahead, Drew. Vito and his team have done an excellent job on this.

Yes. Thanks, Dale. And again good callout for Vito and the team. So Dale mentioned, Vito and Phil from his team, Vito Legrottaglie, our CIO over a basis. They just went live in the UK on Monday. It went very well. Previously we went live in North America on July 15. We will go live in Ireland on August 5 and then in September we will have DSS probably the first week of November so we don't interrupt their strong selling months of September and October obviously, August and July are very strong months for DSS. By November we'll be completely on an integrated global platform.

Great. Thank you and congratulations on the solid quarter.

Thanks, Bill.

Our next question will come from Howard Root, a Private Investor.

Good morning, Dale. How are you doing? Congratulations to you and the entire team on just an outstanding quarter. This looks like probably maybe your best acquisition yet, and we'll see the results, but congrats on that.

Thanks.

I have two questions. First, regarding the DSS acquisition, can you clarify if it has similar gross margins? Is there any difference in gross margins or adjusted gross billings compared to your existing global business?

It's very similar. They have some different rebate structures, but because they have a limited number of vendors, so the rebates will show a little bit more than ours even though we have vendors that have similar rebates and how we get paid. They have funded heads like we have funded heads with our vendor manager team. So if you look at them, they're kind of a micro Climb and they're focused like I said in the K-12 sled and non-profit space. So we pick up some great team members as we look and say, wow, these are people that already do the same thing that we do and have a lot of the same mindset with their vendors as they go to market. So you'll see us amalgamate our teams over the next six months. They have some territory. They don't have a lot of field representation similar to what was before Climb, so our teams will add that to them right off the bat, so they'll all get paid on that stuff as they take their products to market.

Okay. And as I look at the number you gave is about a little over $5 million in adjusted EBITDA for the trailing 12 months, which looks to me like maybe a little bit around 20% of Climb's. Is this about a 20% added to your bottom-line? Is it immediately accretive in that way? Or how do you look at it going forward in terms of percentages?

It's immediately beneficial to our operations. They operate with a very efficient team of 36 employees, similar to our Data Solutions in Ireland, which is quite streamlined. They were a leading vendor of Citrix and now they lead with Adobe. You can expect to see the results in Q3 right away.

Is this addition going to lead to about a 20% increase in your adjusted EBITDA, or am I missing something?

No, you're right, go ahead.

Okay, great. My other question, as usual, is about the future of the business. There was a 31% rise in adjusted gross billings, but I acknowledge that the second quarter last year wasn't particularly strong, making for an easier comparison. However, you're still experiencing mid-double-digit growth, which I focus on in terms of revenue and improving margins. Congratulations on your ERP implementation; that addresses a significant challenge. I haven't noted any other substantial expenses on the horizon, suggesting more profit will flow to the bottom line. Given the strong market demand for your products, do you foresee any factors that could disrupt the consistent growth in your revenue and slight outpacing growth in your bottom line as we look ahead? I wanted to provide you with a chance to discuss future outlook without offering specific guidance.

Let me discuss some macro factors that we track. We monitor both our large public customers and some of our huge competitors. There is often an attempt to categorize us alongside them, but our performance doesn't align with theirs, primarily due to their significant hardware sales. During COVID, logistics issues impacted hardware, and although there has been a slowdown in purchasing endpoints like laptops and servers, there is still continued investment in security, which remains our strong area. We haven’t followed the trends observed by some companies that reported recently. Our analysis of Climb each quarter indicates that vendor performance heavily influences us. For instance, in Q1, we faced a decline due to Sophos underperforming because of some ERP challenges. There are always various reasons behind such trends, but they're generally not due to market conditions. I advise my teams and our investor community that we have a diverse portfolio. If one area isn't performing, we explore other segments. Since our team’s compensation is tied to gross profit, they are highly motivated to generate revenue. This approach has proven successful for us. We focus on new vendor opportunities and assign underperforming vendors to our Elevate team to reduce unnecessary sales efforts. We're still relatively small compared to the overall market, allowing us to adapt swiftly. We consistently evaluate whether we need to make adjustments and maintain discussions around both vendor and acquisition dynamics.

Great. Thanks for the explanation. Congrats, and the results have been impressive. Congrats on a great quarter, and keep up the great work. Thanks.

Thanks, Howard.

And this will conclude our question-and-answer session. I would now like to turn the call back to Mr. Dale Foster for closing remarks.

Thank you, operator. Thank you to all shareholders. In closing, I want to thank the entire Climb team. We've discussed ERP a couple of years ago, and we've finally implemented it. As Drew mentioned, we will integrate it across our organization and complete the process by the end of this year. The number of hours invested by not just our IT team but also our subject matter experts in each division has been significant to ensure a successful launch. Many people associate ERP with difficulties, but our team has managed to keep any disruptions to a minimum, and we are now operational. July marks our first month on the new system. I appreciate everyone who joined. Thank you.

And this will conclude today's teleconference. Ladies and gentlemen, you may now disconnect.