Earnings Call Transcript - CLMB Q2 2025

Operator, Operator

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

Sean Mansouri, Investor Relations Adviser

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 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.

Dale Richard Foster, CEO

Thank you, Sean, and good morning, everyone. As you can see, we had another strong quarter with material increases across all of our key financial metrics. During the quarter, we generated double-digit organic growth by strengthening relationships with customers, growing our line card with new innovative vendors and expanding market share in both the U.S. and Europe. We also benefited this quarter from the incremental contribution and seasonal strength of our acquisition of Douglas Stewart Software or DSS, which typically sees higher demand for education customers as they ramp up ahead of the next school year. Our Climb team continues to identify and align with the most innovative technologies in the market to not only strengthen our vendor ecosystem, but also address increasingly complex challenges our customers face. In Q2 alone, we evaluated 50 potential vendor partnerships and moved forward with just 4 of them. This disciplined approach reflects our commitment to quality over quantity and our focus on delivering differentiated high-impact solutions that drive long-term value across our platform. Let me take a moment to highlight a few of these wins. First, we announced the partnership with Ignite, a leader in secure content collaboration intelligence and governance. This partnership enables us to offer Ignite's cloud-native platform to our partners and their customers across the U.S., reinforcing our commitment to the expanding access of transformative technologies. By adding Ignite to our line card, we are equipping resellers with a trusted, scalable platform that fits seamlessly into both SMB and enterprise environments. This partnership underscores our mission to deliver partner-first technologies that move with the speed of modern business. In Q2, our Climb's U.K. and Ireland team secured an exclusive distribution agreement with IGEL, a global leader in secure endpoint OS solutions for the U.K. and Ireland. This milestone builds on the partnership that we began in 2016 with DataSolutions out of Ireland, which we acquired in 2023. Our ability to drive lead generation and expand IGEL's addressable market in the region led to the sole distribution agreement further validating our strength of our channel reach, execution, and commitment to Europe. We look forward to continuing our partnership with IGEL as we scale together in these key markets. In June, we brought on Vishal Pushpa, Climb's Chief Information Officer. Vishal is a dynamic IT executive with more than 2 decades of strategic leadership across high-tech manufacturing, logistics, distribution, and services. Vishal has led large-scale ERP, CRM, and HCM transformations and has overseen complex M&A integrations while driving the deployment of cutting-edge cloud solutions, AI, automation, and enhanced security infrastructure. He brings a visionary approach to innovation and has a strong track record of fostering global collaboration while anticipating future technology trends. We are pleased to have him join the Climb family and look forward to his invaluable contributions. In addition to Vishal's appointment, in May, we announced the promotion of Carlos Rodrigues to President of North America. Carlos has been a key leader at Climb since 2020, bringing more than 20 years of experience in value-added distribution and a proven track record of driving growth across North America. Since joining Climb, he has played a pivotal role in expanding market share, building high-performance sales teams, and strengthening strategic vendor relationships. In his prior role as Vice President of Sales, Carlos led the development of Climb's dedicated vendor management team and has consistently delivered impactful results through alignment and partner engagement. In this new role, as President, Carlos will oversee the North American sales with a focus on accelerating growth, deepening vendor and partner success, and further expanding Climb's market presence. We're excited to see Carlos bring his leadership and vision to this new role as we continue executing on our growth strategy. Looking ahead, we're focused on building on the momentum from the first half of the year by continuing to execute against our strategic priorities. With our ERP system now fully in place, we're beginning to realize the benefits of improved operational efficiency and scalability, positioning us to drive stronger operating leverage as we grow. Additionally, we're actively evaluating strategic M&A opportunities in North America and overseas that align with our long-term vision and can expand both our capabilities and geographic reach. These initiatives, coupled with our robust balance sheet and demonstrated track record of success, will enable us to deliver on both organic and inorganic objectives in 2025 and beyond. With that, I will turn the call over to our CFO, Matt Sullivan, to take you through our financial results.

Matthew Sullivan, CFO

Thank you, Dale, and good morning, everyone. A quick reminder as we review our second 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 Q2 of 2025 increased 39% to $500.6 million compared to $359.8 million in the year-ago quarter. Distribution segment gross billings increased 40% to $477 million and Solutions segment gross billings increased 19% to $23.5 million. Net sales in the second quarter of $159.3 million increased 73% compared to $92.1 million, which primarily reflects double-digit organic growth from new and existing vendors as well as contribution from our acquisition of DSS in July last year. Gross profit in the second quarter increased 42% to $26.3 million compared to $18.6 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 increased to 5.3% compared to 5.2% in the year-ago period. SG&A expenses in the second quarter were $16.4 million compared to $13 million for the same period in 2024. SG&A from DSS accounted for $900,000 of the increase. SG&A as a percentage of gross billings decreased to 3.3% in Q2 of 2025 compared to 3.6% in the year-ago period. Net income in the second quarter of 2025 increased 74% to $6 million or $1.30 per diluted share compared to $3.4 million or $0.75 per diluted share for the comparable period in 2024. Net income was impacted by a $400,000 charge related to the change in fair value of acquisition contingent consideration associated with DSS. Adjusted net income increased 68% to $6.4 million or $1.39 per diluted share compared to $3.8 million or $0.83 per diluted share for the year-ago period. Adjusted EBITDA in the second quarter increased 64% to $11.4 million compared to $6.9 million in the prior year quarter. The increase was driven by the aforementioned organic growth from both new and existing vendors as well as contribution from DSS. Adjusted EBITDA as a percentage of gross profit or effective margin increased 600 basis points to 43.3% compared to 37.3% in the year-ago period. Turning to our balance sheet. Cash and cash equivalents were $28.6 million as of June 30, 2025, compared to $29.8 million on December 31, 2024, while working capital increased by $12.2 million during this period. The decrease in cash was primarily attributed to the timing of receivable collections and vendor payments. As of June 30, 2025, we have $500,000 of outstanding debt with no borrowings outstanding under our $50 million revolving credit facility with JPMorgan Chase. On July 29, 2025, our Board of Directors declared a quarterly dividend of $0.17 per share of our common stock payable on August 15, 2025, to shareholders of record on August 11, 2025. To echo Dale's earlier comments, we're continuing to explore strategic acquisitions that align with our high-performance culture and strengthen our ability to meet evolving customer needs. With a robust balance sheet, we're well positioned to pursue opportunities that complement our existing portfolio and accelerate growth in key markets. This momentum is a direct result of our team's hard work and execution, and we're excited to carry that forward as we advance both our organic and inorganic growth initiatives throughout 2025. This concludes our prepared remarks. We will now open it up for questions from those participating in the call. Operator, back to you.

Operator, Operator

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

Vincent Alexander Colicchio, Analyst

Dale. Good quarter. My first question is, did security and data center continue to lead growth in the quarter? Or is it broadening out somewhat?

Dale Richard Foster, CEO

It has. Those are our top two, and security being the stronger of those two, Vince. But yes, those are leading it. And it kind of makes sense, right? The security market continues to heat up. In the data center space, as we keep bringing in tools that are either data migration tools or storage tools, that's going to be our leader for quite some time.

Vincent Alexander Colicchio, Analyst

And how did your top 20 vendors perform versus the overall business? Are they keeping track, staying at a pace in line?

Dale Richard Foster, CEO

If you look at our top 20 vendors, there are probably about 5 or 6 at the lower end of that range, from 12 to 20, considering that some others are moving up. One of the companies we've discussed, Darktrace, is expected to have a greater impact as we progress through the year since we have just begun collaborating with them and aligning our teams. This will likely be the most significant influence in the second half of the year. There are definitely new entrants that could break into the top 20. While not much has changed in the top 10, we do have some vendors from 10 to 20 that are performing better this quarter.

Vincent Alexander Colicchio, Analyst

And were there any large deals which made this quarter especially strong, which may not necessarily recur in the following quarter?

Dale Richard Foster, CEO

Yes. We have discussed this internally and consider VAST Data to be organic since we have owned the company for about three years. There have been fluctuations in our orders; a VAST order we had planned for Q3 was moved to Q2, so we will need to compensate for that in Q3. This definitely contributed positively to our results this quarter, and even without that, we were still experiencing strong growth.

Vincent Alexander Colicchio, Analyst

And are you seeing meaningful synergies as of yet from the Douglas Stewart acquisition?

Dale Richard Foster, CEO

We do. So we already announced that they're on our ERP systems and their lines have moved into our common portfolio of vendors. We're still carving out and calling out, hey, we can go after this K-12 and higher ed space. Just like I said in my comments, this is the growth and excitement period for that as everybody is going into the school year and everybody is extinguishing their budgets by the states at the end of June and then buying new going into the new school year. Yes, I mean, we have integrated that team into our teams. Our teams have 14 regional teams and then some dedicated teams in North America, and they're already not only quoting and processing but also learning the Douglas Stewart product lines.

Operator, Operator

We will move next with Howard Root, Private Investor.

Unidentified Analyst, Analyst

Congratulations. I mean, that was just another outstanding quarter. Very little to explain actually in the results. It's kind of hard to find stuff to pick on. But I've got a couple of questions. I guess, first on a couple of little things on the income statement. I've always looked at it as your gross margin as a percent of gross billings and that, as you said, moved up from 5% to 5.3%. And it's always been that 5% was kind of the target. Is that a trend? Or is that just a little bouncing around? Or how do you see that going forward on gross margin?

Matthew Sullivan, CFO

Thanks, Howard. So yes, for Q2 of this year, we went from 5.2% of Q2 last year to 5.3% for this quarter. Internally, we continue to project it to be in that 5%, 5.1%. The real driver of that higher percentage, a slightly higher percentage this quarter, was the timing of that, the lumpy transactions that Dale just alluded to. Some have higher margins than our typical base business, but that's what really contributed to the higher gross profit as a percentage of gross billings.

Dale Richard Foster, CEO

Good question, Howard. We don't expect this to be a consistent trend; it will remain uneven like in the past, primarily because VAST has large orders, which usually come with significant margins. As Matt mentioned, we often get inquiries from investors about expanding our margins. Achieving this will involve growing our solutions team, as we aim to enhance our service offerings, which will help improve margins in basis points. However, we are still projected to stay within the 5% to 5.1% range for now.

Unidentified Analyst, Analyst

And then on SG&A, I mean that jumped up by 28% year-over-year, but your gross billings went up by 39%. So your percent goes from 3.6% down to 3.3%. And with you implementing ERP and growing and setting the stage, I mean, that's all understandable. But how do you see that going forward? Do you see that getting closer to 3% of gross billings? Is that going to be a trend?

Matthew Sullivan, CFO

I think the percentage that you saw this quarter is what we expect to see as we move forward. So we had a $900,000 contribution of DSS this quarter that we didn't have in the prior year quarter. But that 3.3% range is more consistent with what we expect going forward.

Dale Richard Foster, CEO

Yes, DSS wasn't comparable to last year because we acquired them in July of last year, which contributed to the increased SG&A. We've integrated them, and they didn't have much infrastructure. So when considering how to streamline the back office, it's primarily about bringing the teams together and seeking efficiencies. The DSS expenses have been the main factor in this regard.

Unidentified Analyst, Analyst

And then kind of on your international side, is there anything material on tariffs or currency fluctuation that you see right now that could affect things going forward?

Matthew Sullivan, CFO

So we talked about the tariff; we've had no real impact. We have legal entities in the U.K. and Ireland and some of the other EU countries. So we can play with that as far as we're dealing with and shipping. We haven't had an impact on that. One thing we have at board meetings, of course, before these earnings calls, and we talk about our FX and how we deal with that. We're just trying to come up with better schemes to deal with our currency because most of our vendors are buying in U.S. dollars, so any kind of fluctuation as the dollar got weaker, we're going to have that impact. So we're doing some hedging, but we're looking for better strategies because we have realized and unrealized gains, and one quarter over another will affect us. A lot of times, we'll get that pickup, but it will be in a quarter or two down.

Unidentified Analyst, Analyst

So looking bigger picture, I kind of look back; it was back Q3 of 2022. So less than 3 years ago, you crossed over into the $1 billion in gross billings, and now you're crossing $2 billion, and back on the call, I asked how does this continue? I mean, $1 billion is a big number. And your response was, in your market, $1 billion is still small potatoes that there's a lot of area going forward, which you've proved yourself correct over the last 2-plus years. But as you cross the $2 billion, do you still see that? I mean you still see yourself as a fairly small player in the overall market with the potential to continue this type of growth going forward? Or when will you reach kind of a little bit of a limitation on large-sized numbers?

Matthew Sullivan, CFO

You're right. We are still a small player in the market. Recently, we met with 50 different vendors who have choices about how they want to distribute their products. When it comes to distribution, they generally gravitate toward the biggest players like Ingram Micro, SYNNEX, Tech Data, and Arrow globally. The next largest player is Exclusive Networks, which operates in the $5 billion to $6 billion range and was taken private recently. We're still quite small in comparison. Although we discuss competing with these big players, it's only in a limited aspect or within smaller divisions. Our potential for growth between $2 billion and $3 billion is significant. In areas like software application and security data centers, we see a $2 billion to $20 billion opportunity. This indicates considerable room for growth before we become disruptive enough to prompt any significant responses from the larger players. We are not disruptive at this stage, which allows us to continue growing as an emerging, high-touch, fast-to-market channel partner.

Unidentified Analyst, Analyst

I mean that's just so unusual for me that it's just kind of a little bit hard to believe, but you've proven me wrong.

Dale Richard Foster, CEO

Well, Howard, if you look at our market, all the roll-up of distributors in the United States ended up in 2013. So there's nobody, right? We have these three massive ones that are worldwide but really focused in North America and then us. There are some other ones that are in adjacent market space, but nothing that's directly competitive. Our CMO loves to say that there could be two or three more Climbs in our space, and we still would have that many vendors to look at and that many vendors on board. It's shocking how many $100 million ARR SaaS vendors are out there that we even touched it. The ones we touch, maybe they're not ready for us, maybe we're not ready for them, but there are a lot of them to choose from, and that's the excitement of our market. A lot of good acquisition targets overseas and a lot of good vendors coming into our space.

Unidentified Analyst, Analyst

I appreciate it. And then the final question for me is, if you could talk a little bit about your acquisition process and what you see out there in terms of the market for potential acquisitions and the valuation that you're seeing? And how you view currency to do the acquisition, what you've done so far has been cash and a little bit of debt, which you've done a great job of making it accretive almost immediately and paying off the debt. But how do you see it going forward? I assume you're looking at a couple of bigger things as well as more things like what you've done already?

Dale Richard Foster, CEO

Yes, that's correct. This year, we're focusing on acquisitions that we would finance with cash. They may be small, but they hold strategic value for us. We have a plan in place concerning acquisitions, particularly targeting services companies, as there are two main reasons behind this. We appreciate the margin profile and aim to strengthen our relationships with existing vendors. In the services sector, vendors often achieve 80% margins on their products, while an internal services team may only bring in 30%. If they can transfer that responsibility to us, it's advantageous. We won't compete against our current customers, and if vendors lack those capabilities and seek our assistance, that's something I want to integrate into our company. We're considering a few small options in that area. Looking ahead to 2026 and beyond, we'll need to focus on more substantial acquisitions to significantly impact Climb. These will be more relevant for 2026 and 2027. However, there are many promising targets available, but any acquisitions this year will be cash-based.

Unidentified Analyst, Analyst

And valuations on those targets, have they changed at all? Or is it a strong market?

Dale Richard Foster, CEO

Yes, here's how we start, Howard, and it's funny because we're being rewarded in the market for being a differentiator. As our go-to-market, our multiples are a lot higher. But we still start in that 7 to 9 multiple. Then it all depends. If you look at Douglas Stewart, it was a much lower margin multiple because they were still concentrated with one vendor. We also look at the acquisitions as far as what vendors they bring in because we think that's the lifeblood of what we have inside of Climb and what we take to the market. We start with that, and then it's the give and take of what that company really brings to us and can we actually expand? We always ask ourselves, can we actually get it to all of our territories depending on what they bring? So we started that. As for whether we paid more than the multiple we're trading at, no, we have not. So I know that's not a perfect answer, but the answer is it depends.

Unidentified Analyst, Analyst

No, that's very helpful. So congratulations once again to you guys and to the whole Climb team on another outstanding quarter, just great job.

Dale Richard Foster, CEO

Thanks, Howard. Good talking to you.

Operator, Operator

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

Vincent Alexander Colicchio, Analyst

Yes, Dale. So obviously, the business appears quite robust, but I am wondering about any signs of economic headwinds, any delays, anything of that nature?

Dale Richard Foster, CEO

We do not see any signs of economic headwinds, Vince. It goes back to Howard's earlier comments that we are still very small in our space. Even if we aim to reach the $2 billion mark, we remain small compared to the overall IT market, which is valued between $1 trillion and $2 trillion. There are many new entrants, and we continue to observe significant investment from venture capitalists into various startups. Our pipeline of vendors is strong, and while we have previously needed to seek them out, over the last 18 months, they have been coming to us. As for the downside in Q2, we did lose Citrix, which we announced in Q1 when we acquired DataSolutions. The team was performing well in Q1, but we encountered a setback in Q2. That said, our sales teams have diverse sales cycles and tools; if they aren't selling Citrix, they will sell other products. We have not adjusted our budget in anticipation of this change, believing we can fill that gap. I'm proud of our overall team; they're doing a fantastic job adapting by introducing new products to our customer base.

Operator, Operator

Thank you. This concludes our Q&A session. I will now turn the call over to Mr. Dale Foster for closing remarks.

Dale Richard Foster, CEO

Thanks, operator. Once again, thanks to all of our shareholders for supporting us and also to the greater Climb team for their excellent performance. They've continued to focus on growing Climb. And with that, we'll end the call. Thank you.

Operator, Operator

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