Climb Global Solutions, Inc. Q3 FY2025 Earnings Call

Good morning, everyone, and thank you for participating in today's conference call to discuss Climb Global Solutions' financial results for the third quarter ended September 30, 2025. Joining us today are Climb's CEO, Mr. Dale Foster, CFO; Mr. Matthew Sullivan; Chief Alliances Officer, Mr. Charles Bass; and Investor Relations adviser, Mr. Sean Mansouri with Elevate IR. By now, everyone should have access to the third quarter 2025 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 Climb Global Solutions website at www.climbglobalsolutions.com. This call will also be available for webcast replay on the company's website. Following management remarks, we will open the call for your questions. I would now like to turn the call over to Mr. Mansouri for introductory comments.

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 key operational metrics and non-GAAP financial measures, including gross billings, adjusted EBITDA, adjusted net income and EPS and effective margin 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'll now turn the call over to Climb's CEO, Dale Foster.

Thanks, Sean, and good morning, everyone. In Q3, we generated double-digit organic growth and continued to benefit from our acquisition of Douglas Stewart Software, which we acquired in July of last year. We continue to deepen our partnerships with existing vendors while signing new cutting-edge partners to our Line Card. Our team consistently delivers solid results, maintains operational discipline and continues driving growth even with the challenging comparables from last year. Before diving into Q3 operational updates, I'd like to quickly pass the call over to our Chief Alliance Officer, Charles Bass, to take you through our vendor selection highlights for the quarter. Charles?

Thanks, Dale, and good morning, everyone. During the third quarter, we evaluated over 70 potential vendor partners and entered agreements with just 4. This reflects our selective approach to vendor expansion, focusing on innovation, market differentiation, and long-term alignment with our strategic goals. Each potential partner goes through a thorough vetting process that examines product differentiation, market demand, and integration potential within our go-to-market strategy. This approach ensures we continue to provide advanced solutions to our customers while upholding the quality standards that drive sustainable growth and value creation across our business. I’d like to highlight two of these wins and how they position us for future success. First, we launched a partnership with Liongard, a company based in Houston, Texas, that provides advanced attack surface management and intelligent automation for managed service providers. Liongard's platform offers deep visibility across every asset in an MSP’s environment, delivering real-time intelligence and continuous change detection to proactively identify risks and maintain compliance. This addition enhances our ability to support MSP partners with tools that provide unparalleled operational insight and control in increasingly complex IT ecosystems. While most of our customers still identify as traditional VARs, a growing number see themselves as service providers. Liongard is exactly the type of product they need to succeed and positions us well for the future. We also partnered with another Texas-based company called Halcyon, located in Austin, which specializes in anti-ransomware and cyber resilience. Halcyon’s product is designed to prevent, detect, and neutralize ransomware threats, helping organizations mitigate the business impact of these attacks. Halcyon strategically enhances our cybersecurity portfolio, allowing us to provide comprehensive protection and resilience for customers facing increasingly sophisticated cyber threats. In fact, Halcyon has already collaborated with one of our largest and best manufacturer partners, Sophos, to enhance their security offerings through co-selling. Halcyon can be offered as a stand-alone product but is also ideal for co-selling with several of our existing partners, making them a perfect fit for Climb’s future. With that, Dale, I'll hand it back to you.

Thanks, Charles. I'd also like to highlight our operations overseas. Our European team continues to demonstrate strong execution as we expand our capabilities in one of the market's fastest-growing areas, which is artificial intelligence. AI has become a top priority for both our customers and partners, yet many are still defining practical strategies and identifying the right manufacturers to align with. To help bridge this gap, our team led by Martin Bichler launched Climb AI Academy in the DACH region earlier this year. The Climb AI Academy was designed to equip our infrastructure partners with the tools and expertise to effectively position themselves in the AI space, while guiding AI consultants through the complexity of this rapidly evolving market. The program offers manufacturer-neutral training, clear AI readiness guidelines and structured curriculum that spans from foundational to expert levels, ensuring every participant receives tailored applicable knowledge. In addition to the AI Academy, it provides internationally recognized ISO and IEC certifications, such as Certified AI Manager course delivered by trainers with extensive real-world experience. This hands-on approach enables our partners to better translate theory into practice, ultimately helping them deliver more impactful AI-driven solutions to their customers. With more than 700 participants to date and highly positive feedback, our initiative is proving to be a powerful differentiator in helping partners navigate and succeed in the accelerating AI market. Looking ahead, we'll continue to work through a healthy pipeline of strategic acquisition opportunities to enhance our offerings and expand our presence in Western Europe. We are seeing increasing interest in the European markets and believe our growing reputation as a trusted high-touch distribution partner positions us well to capture emerging opportunities across the region. These initiatives, coupled with our robust balance sheet and demonstrated track record of accretive M&A will enable us to close out 2025 strong and deliver another year of record results. With that, I'm going to turn the call over to our CFO, Matt Sullivan, and he'll take you through the financial results. Matt?

Thank you, Dale, and good morning, everyone. A quick reminder as we review our third quarter financial results, all comparisons and variance commentary refer to the prior year quarter unless otherwise specified. As reported in our earnings press release, gross billings in Q3 2025 increased 8% to $504.6 million, compared to $465.2 million a year ago. Distribution segment gross billings increased 9% to $481.9 million and Solutions segment gross billings decreased 5% to $22.7 million. Net sales in the third quarter of 2025 increased 35% to $161.3 million compared to $119.3 million, which primarily reflects double-digit organic growth from new and existing vendors as well as contribution from our acquisition of DSS in July of last year. Gross profit in the third quarter increased 6% to $25.7 million, compared to $24.3 million. Again, the increase was driven by organic growth from new and existing vendors in both North America and Europe as well as contribution from DSS. Gross profit as a percentage of gross billings was 5.1%, compared to 5.2% in the year-ago period. SG&A expenses in the third quarter were $16.2 million compared to $13.9 million for the same period in 2024. SG&A as a percentage of gross billings was 3.2% in Q3 2025, compared to 3% in the year-ago period. Net income in the third quarter of 2025 was $4.7 million or $1.02 per diluted share, compared to $5.5 million or $1.19 per diluted share for the comparable period in 2024. Adjusted net income was $6 million or $1.31 per diluted share compared to $7.1 million or $1.55 per diluted share for the year-ago period. Adjusted EBITDA in the third quarter was $10.9 million compared to $11.1 million in the prior year quarter. The slight decrease was primarily driven by a large vendor transaction in the year-ago period that carried a higher flow-through to adjusted EBITDA as sales compensation related to this transaction was paid through a contingent earn-out. Adjusted EBITDA as a percentage of gross profit or effective margin was 42.3% compared to 45.7% in the year-ago period. Turning to our balance sheet. Cash and cash equivalents were $49.8 million as of September 30, 2025, compared to $29.8 million on December 31, 2024. While working capital increased by $18.3 million during this period. The increase in cash was primarily attributed to the timing of receivable collections and vendor payments. As of September 30, 2025, we had $300,000 outstanding debt with no borrowings under our $50 million revolving credit facility with JPMorgan Chase. On October 28, 2025, our Board of Directors declared a quarterly dividend of $0.17 per share of our common stock payable on November 17, 2025 to shareholders of record on November 10, 2025. As we look to the remainder of the year, our priorities remain clear: to build on our operational momentum and continue executing against the strategic initiatives that have driven our success to date. We're actively evaluating acquisition opportunities that align with our growth strategy, enhance our capabilities and strengthen our presence across key markets. With solid momentum across our business and a proven track record of execution, we believe we will close out 2025 on a strong note and set the stage for another year of record performance. This concludes our prepared remarks. We will now open it up for questions from those participating in the call. Operator, back to you.

We'll take our first question from Vincent Colicchio with Barrington Research.

Yes, Dale, congrats on another strong double-digit organic growth quarter. Curious, how would you characterize the quarter? Was the growth broad-based across your top 20? Also, were there any large lumpy deals in the quarter?

Yes, no lumpy deals. And then, hence, we've talked about it probably too much. We talked about in Q2 that we had one of the large orders pull into Q2 and we wouldn't see in Q3. And then as Matt mentioned, the comparable year-over-year, we had one large in Q3 of last year. And it's no secret, they're a vast data. The data center all focused on the AI market and going into data centers to deliver as much data as fast as an AI engine will take it in. So outside of those 2 things, definitely organic growth, strong in the majority of our vendors. We only typically talk about 2 vendors over the last so many years, Sophos and SolarWinds. Sophos is a little flat for us. SolarWinds is going in the right direction, they're acquired by Turn River, and we're seeing some positives come out of that.

And then in terms of industries, security, I assume, still leads growth. Is that right?

We're seeing over 60% representation in the cybersecurity sector, and while Charles can elaborate on this, there continues to be a significant number of companies approaching us to expand our Line Card, primarily within the security space. We have numerous adjacent markets, but our main focus remains there. Last week, we participated in the Canalys event, which was beneficial for observing some data collectors that don’t have stakes in our business, and conversely, we don’t have stakes in theirs. Over the next three years, this is projected to remain one of the rapidly growing markets when examining various segments within the IT field.

And then maybe one for Matt. Were there any early pay price discounts of any magnitude that impacted margin?

There were no new relationships regarding early pay discounts. Our similar customers continue to benefit from this offer, and its percentage of gross billings remains consistent over time.

Dale, regarding the training program you mentioned in Europe, do we have a similar program in the U.S.?

We don't. Martin is out of Germany, and he started it. We really what got us kicked off is one of the vendors we signed called Unframe, which is in the AI building blocks. So if you want to have a certain structure in your company that you want to use AI for. This is where you can actually go and get those building blocks. So it started with that and then expanded into some other vendors and he built it into a full academy. And we'll roll that into other regions. Of course, the European side first as Martin took the lead on then you'll see it come to the U.S. As we talk about that, do we have another set of vendors that are AI vendors and it's still consistent with probably what we said a year ago, and that is our vendors are building AI capability into their existing products. So we're going to see it that way. And if there is different products, we'll pick it up and talk about them in a separate what we call in our different segments, our technology segments.

We will now hear from Howard Root, a private investor.

Congratulations on really good quarter. I got a couple of little questions and then a more general one. Kind of first, no mention of tariffs, and I think nothing's changed there. But remind me, is there any impact on tariffs on your business?

There really isn't any impact, and Matt can elaborate. We just don’t observe it. The main point, which we didn’t discuss earlier, is the foreign exchange with currencies since most of our vendors are purchasing in USD while we're selling in euros, Great British pounds, or Canadian dollars. The only significant aspect is related to Canada. We approach this from a quoting perspective; our quotes used to be valid for 30 days but are now around 5 days to address both tariff and currency issues, though nothing substantial has arisen.

Okay. Great. You made some significant reductions in accounts receivable and accounts payable, with accounts receivable down by $65 million sequentially and accounts payable down by $50 million. Can you explain how this is happening? Is this the expected level moving forward, or what are your expectations for accounts receivable and accounts payable in the future?

Yes, that varies each quarter. Comparing to December 31 of last year, our fourth quarter is typically our largest, and last year's fourth quarter was a record for us. It's mainly about collecting receivables and managing payables after year-end. The volumes we had at December 31 for receivables and payables should return to that level as we implement our strategy for the upcoming fourth quarter.

The main point is the timing of our payments to vendors. If a vendor requests more cash at the end of the quarter, we may pay them early with some conditions, allowing them to gain some margin. Matt and I frequently discuss this internally. I believe we pay our vendors too quickly and collect too slowly, but collecting is challenging since we serve many resellers while vendors typically collect from a few distributors. This is something we closely monitor as it significantly impacts our working capital.

Okay. So do you see these $50 million fluctuations from quarter to quarter as a regular part of your business? Or is this an exception?

No. If you're comparing it to the June quarter, we had some larger transactions with a higher sales price and higher cost of sale amounts in Q2, which didn't necessarily repeat themselves. We collected them and paid the vendor payables in Q3. However, those larger transactions will cause a spike in the receivable and payable accordingly.

Yes. And Howard, those orders are $30 million orders, right? It's not just one order that's $30 million. So you'll see it all at one time, and that's what was pulled forward in Q2.

Okay. I get it. Now it's kind of the nature of the business with the large size of the orders...

There are approximately $190 million in adjusted gross billings from our acquisition at the end of July last year. Their seasonality is influenced by the fact that we mainly sell to the education sector, including K-12 and higher education. Most purchasing occurs in the summer, as about 40 states receive their budgets and new funding at the end of June. This budget allows for the acquisition of both software and hardware in preparation for the new school year, leading to strong buying behavior from May onwards. Our largest vendor, Adobe, plays a significant role in this landscape. Adobe is one of the largest players in AI, though many may not realize the extent to which AI is integrated into their products. Their product suite is impressively broad, and they are actively engaging in the education sector. Students trained on Adobe products are likely to carry that knowledge into the workforce, as Adobe is a dominant force in the market, making it essential for customers to purchase those licenses. Consequently, we expect seasonal patterns to continue from May through October. However, changes in Adobe's operations may lead to fluctuations in our gross profit, even if adjusted gross billings decrease due to the rebates we can negotiate, which positions us to capitalize on that opportunity.

Okay. And then the Solutions segment was kind of the one negative with the gross billings down by 5%. What was the cause of that? And what do you see going forward for that segment?

So my core Solutions piece is really in the U.K., right? And that's when we acquired CDF and had the split distribution and the Solutions piece. It's our U.S. side of it that has some fluctuations. And we just have a small team in the U.S. that has some very large customers. And sometimes they're renewing other times they're not. So that one's just a blip. You won't see that going forward like we saw in this past quarter.

Okay. The larger topic is mergers and acquisitions. I noticed $600,000 in acquisition-related costs for the quarter, but there were no deals, and the last deal was the DSS a year ago. Can you clarify what the $600,000 was related to?

We are looking at increasing our spending, particularly for costs associated with overseas activities. In general, we are focusing on larger deals because the expense of smaller deals does not justify the resources we've previously dedicated to them. We aim to enhance our efficiency in mergers and acquisitions, as pursuing many small transactions does not make sense. Although we aim for an aggressive outlook for 2026 and would love to finalize a deal this year, most of our focus will shift to 2026. There are various costs involved that I cannot discuss right now, but they pertain to future vendor acquisitions and encompass a range of expenditures.

But safe to say that's all forward-looking on deals, not related to past deals done?

That's correct. What we are seeing for this current quarter is the costs associated with our ongoing evaluation of potential strategic acquisitions. We have a robust pipeline that we continue to assess, and there are costs related to the evaluation of each of these opportunities.

Okay. So then as I always try to encourage you to talk future here. If you look at M&A and I think 2 different places you said a healthy appetite and actively evaluating, and it's been now almost a year now since your last acquisition. And now you got almost, well you have $50 million cash and a line of credit for $50 million. So you got $100 million of cash available. Can you talk about what you're seeing out there in terms of size of deal, you got into a little bit of it, but are we looking at $50 million deals, $100 million deals, cash deals, debt deals, equity deals, all of the above? What's your vision kind of as to how much the M&A is going to affect the company? And how much do you see your organic continuing to drive the growth of this company?

Yes. The organic aspect relates to our efforts in onboarding and letting go of vendors that consume our time as efficiently as possible. This is an ongoing focus for Charles and his team. Currently, we are managing 72 vendors, which ties into some of our investments. To expedite the evaluation of companies, we added more members to Charles' team. This has opened up more opportunities, but our sales teams are indicating that their sales cycles are full. Therefore, we aim to remove underperforming vendors from our lineup to reduce clutter. This process is continuous. I would like to point out that while we have noticed a slight reduction in the number of vendors quarter over quarter, we have not observed a slowdown in the market over the past six quarters. Regarding acquisitions, we are considering opportunities up to $40 million, as well as smaller strategic deals under $10 million that would enhance our technical capabilities. I often remind people that in distribution, where margins are low, it's crucial to maintain technical resources to support vendors, and these resources are typically the first to be cut during downsizing. We are being cautious with our investments and identifying companies that have talented developers and the capability to support our vendors, which will increase our margins. We currently have two or three technical acquisitions on our radar, while others are purely distribution-focused, with the two larger ones located overseas. This will allow us to gain not just new vendors but also access to new territories. We are monitoring the markets and have observed a slight decline in deal multiples overseas, which benefits us. So, we are optimistic about closing some of these deals.

So then on multiples, I mean, it's $10 million to $40 million, that's your acquisition price. What type of gross billings? Or what type of multiples would you be looking at in those type of deals?

So we evaluate it this way, right? We firstly look at saying, 'Hey, this is where our multiple is.' We think we're trading at a pretty high multiple to our competitors, and it's hard to define our competitors because we have the monster big ones and then we have some smaller ones that are not public, so you have to do the best you can in the private markets. But we look at them a couple of ways. What do they bring to Climb, right? And our strategic plan is, is it a territory? Is it vendors? How good is the team? And is the cultural fit for us? I had one that I spent quite a bit of time with, and it just was not a cultural fit. It would have been a mess I think, just because we just weren't going to get along in how we went to market. But the real key piece for me is what is the margin profile, right? There's higher margin European space as we've seen with our acquisitions. So if that margin profile is a lot higher, and we think we can maintain that and add more vendors to that, then that would garner a higher multiple. And of course, they'd be typically asking for a higher multiple. Do they have a concentration on one vendor like Douglas Stewart. So hence, the multiple is much lower a year when we acquired them. So not a lot of factors, but those are the main core ones for that.

We do have a follow-up from Vincent Colicchio with Barrington Research.

Yes. Dale, just trying to assess if there's any signs of any kind of slowdown in sales cycles change, anything like that? Or based on your numbers, it looks like a pretty healthy environment.

Yes. As I mentioned earlier, Sophos has remained stable. We experienced strong performance in the early quarters of this year with Sophos, and we aim to finish the year on a high note with them. Historically, Q4 has a cyclical nature, and for the past five years, we've been focused on license renewals during this time. Many clients exhaust their budgets in Q4, but we expect to see another strong quarter similar to last year. We don't perceive any softness in the markets. We'll need to continue addressing this, Vince, until we achieve greater scale. The substantial data transactions can be unpredictable, and we want to take full advantage of them. We will be transparent with everyone about any fluctuations in year-over-year performance.

Thank you. And this concludes our Q&A session. I will now turn the call back to Mr. Foster for closing remarks.

Thank you, operator. I'd like to thank everybody and the entire Climb team, including our shareholders for their commitment, providing just a great experience to our customers and to our vendor partners. And with that, we'll close the call. Thank you.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.