Earnings Call Transcript - CLMB Q3 2024

Operator, Operator

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, 2024. Joining us today are Climb’s CEO, Mr. Dale Foster; the company’s CFO, Mr. Drew Clark; and the company’s Investor Relation Adviser, Mr. Sean Mansouri with Elevate IR. By now, everyone should have access to the third quarter 2024 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 made available for webcast replay on the company’s website. For management remarks – following management remarks, we will open the floor for questions. I’d now like to turn the call over to Mr. Mansouri for introductory comments.

Sean Mansouri, Investor Relation 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 non-GAAP financial measures, including adjusted 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. With that, I’ll turn the call over to Climb’s CEO, Dale Foster.

Dale Foster, CEO

Thank you, Sean, and good morning, everyone. Q3 marked another exceptional period of growth and profitability for Climb as we generated record levels across all of our key financial metrics while delivering on our acquisition objectives. Our strong performance was driven by the continued execution of our core initiatives and the integration of Douglas Stewart Software, or DSS, and DataSolutions Ireland onto our operating platforms. Also in Q3, we rebranded DataSolutions Ireland to Climb Channel Solutions with a great evening on September 5 in Dublin sharing our launch with the Climb team and the vendors and customers. Additionally, we generated double-digit organic growth in both the U.S. and Europe as we strengthened relationships with existing partners, while signing new disruptive vendors to our Line Card. As a brief reminder of our recent acquisition, DSS, a Wisconsin-based IT distributor that brings 20 new vendor partners to Climb, including Adobe, Go Guardian, and Incident IQ, to name a few. DSS is a proven leader in the education technology channel and provides products and services to more than 500 value-added retailers and over 250 campus stores across North America in both K-12 and higher education markets. We are actively identifying cross-selling opportunities and cost synergies and look forward to exploring additional benefits as we further integrate DSS into our sales and operating workflows. Throughout the quarter, we worked through a robust pipeline of emerging vendors. We continue to identify and partner with the most innovative technologies in the market that align with our vendor ecosystems to solve today’s most difficult IT challenges. For example, in Q3, we evaluated 29 vendors but signed agreements with only 4 of them. I’d like to quickly highlight one of these wins. In September, we announced a partnership with A-LIGN, a leading security and compliance solution provider trusted by more than 4,000 global organizations. A-LIGN combines deep compliance expertise and innovative audit management technology to mitigate cybersecurity risks while navigating complex regulatory requirements. By partnering with A-LIGN, we are ensuring that our channel partners have the resources needed to efficiently move from audit to strategic compliance. We look forward to building a mutually beneficial relationship with A-LIGN as we continue to scale our businesses globally. On the topic of scaling overseas, we recently took our first steps toward building our presence in Germany, a key market in Western Europe. As we have stated many times, deals in Western Europe are built on trust and local connections. For the first time in the company’s history, we have dedicated a team to be on the ground focused on building and nurturing these relationships. We recently completed a Climb branding kickoff, signaling the start of a more committed and comprehensive approach in this region. We are thrilled to launch this initiative and look forward to building out Climb’s presence in Germany and the DACH region. As we mentioned before, we went live with our new ERP system during the quarter. While it is early with our new systems, we expect this platform to significantly enhance our operations over time, both in North America and overseas, by providing better access to real-time data across finance, sales, and other operating functions. We anticipate realizing operational efficiencies and improved decision-making capability to support our growth as we continue to scale our global footprint. Looking ahead, we remain focused on leveraging our global infrastructure to drive organic growth while actively exploring M&A targets that enhance our geographic footprint, broaden our service and solution offerings, and, most importantly, align with our high-performance culture. We anticipate unlocking additional synergies from our acquisitions and further improving operating leverage as we execute across our global platform. These initiatives, coupled with our proven track record of accretive M&A, will enable us to close out 2024 on a strong note and achieve another record year of performance. With that, I will turn the call over to our CFO, Drew Clark, who will take you through the financial results.

Drew Clark, CFO

Thank you, Dale. Good morning, everyone. A quick reminder as we review the financial results of our third quarter. All comparisons and variance commentary refer to the prior year quarter unless otherwise specified. Furthermore, as Sean mentioned at the start of the call, we discuss various non-GAAP operating and financial metrics as supplemental measures of the performance of our business. As reported in our earnings press release, adjusted gross billings, or AGB, increased 65% to $465.2 million compared to $281.9 million in the year-ago quarter. Net sales in the third quarter of 2024 increased 52% to $119.3 million compared to $78.5 million, which grew at a lower rate than AGB due to a greater percentage of sales recognized on a net basis in the quarter. Growth in AGB was attributed to organic growth from new and existing vendors as well as the contribution from our acquisitions of DSS on July 31 and DataSolutions on October 6 of last year. DataSolutions and DSS combined for $81.3 million or 44% of the growth in AGB, while our core business grew by $102 million, representing 56% of the increase and year-over-year growth of 36%, which was positively impacted by several VAST orders in the quarter. Gross profit, or GP, in the third quarter increased 70% to $24.3 million compared to $14.3 million. Again, the increase was driven by organic growth from new and existing vendors in both North America and Europe, representing $6 million or 60% of the increase, as well as the contributions from DSS and DataSolutions, which represented $4 million or 40% of the growth. Gross profit as a percentage of adjusted gross billings increased to 5.2% compared to 5.1%. SG&A expenses in the third quarter were $13.9 million compared to $10.1 million for the same period in 2023. SG&A from DSS and DataSolutions accounted for $1.8 million of the increase, along with variable sales compensation attributed to the growth in AGB and the overall growth of our operations. SG&A as a percentage of AGB decreased to 3% compared to 3.6% in the year-ago period. Net income in the third quarter of 2024 increased more than 2x to $5.5 million or $1.19 per diluted share compared to $2.4 million or $0.52 per diluted share for the comparable period in 2023. As referenced in our press release, net income was impacted by a $1.2 million charge related to a change in the fair value of acquisition contingent consideration associated with DataSolutions. Adjusted net income also increased more than 2x to $7.1 million or $1.55 per diluted share compared to $2.6 million or $0.56 per diluted share for the year-ago period. The company’s earnings per diluted share in the third quarter of 2024 was negatively impacted by $0.05 in FX compared to the prior year quarter. Adjusted EBITDA in the third quarter increased 96% to $9.9 million compared to $5.1 million in the prior year quarter. The increase was driven by the aforementioned organic growth from both new and existing vendors in our core business, which represented $2.8 million or 58% of the increase as well as a $2 million contribution from DSS and DataSolutions. Adjusted EBITDA as a percentage of gross profit or effective margin increased 500 basis points to 41% compared to 36% in the year-ago period. Turning to our balance sheet, cash and cash equivalents were $22.1 million as of September 30, 2024, compared to $36.3 million on December 31, 2023, while working capital decreased by $12.3 million during the period. The decrease in cash was primarily attributed to the cash paid at closing for our acquisition of DSS of $20.9 million as well as the normal timing of receivable collections and vendor payments. As of September 30, 2024, we had $900,000 of outstanding debt with no borrowings outstanding under our $50 million revolving credit facility with JPMorgan Chase. On October 28, consistent with prior quarters, our Board of Directors declared a quarterly dividend of $0.17 per share of our common stock to stockholders of record as of November 11, 2024, and payable on November 15, 2024. To echo Dale’s earlier comments, our plans remain unchanged: leverage our global presence to drive organic growth while expanding our Line Card with the most innovative companies in the market. Our strong balance sheet will continue to drive our M&A strategy as we evaluate new targets in Western Europe and beyond. We are proud of our team’s hard work and dedication in achieving these record results and look forward to maintaining this momentum through the close of 2024 and into the year ahead. As Dale and I continually reinforce to our team, let’s keep climbing. This concludes our prepared remarks. We’ll now open it up to questions from those participating in the call.

Operator, Operator

Our first question will come from Vincent Colicchio with Barrington Research. Your line is open.

Vincent Colicchio, Analyst

Yes. Good morning, Dale. Nice quarter. Curious if your top 20 vendors grew in line with the overall business.

Dale Foster, CEO

Yes. I wouldn’t say all 20 of them, but the core of them, that’s what’s really driving the growth on the organic side, Vince. We still have some new entrants into the top 20. If you look at positions 14 through 20, there are more of them as you go down the Line Card. So they'll jump up. And it depends. If you look at Q3, which historically has been heavily into the public sector space, we’ll see the vendors that are focused on that increase in that area, but nothing out of the ordinary.

Vincent Colicchio, Analyst

And I’m curious. I assume security continues to drive lead growth amongst your technology segments. I’m curious if there are any technology segments that performed better or worse than expected outside of that.

Dale Foster, CEO

Yes. As Drew mentioned, VAST Data, we talked about it. It’s a vendor that we signed on the UK side with the acquisition of Spinnakar, and that brought us to the U.S. So we had our first order come in with sizable potential out of North America and Canada. We’re starting to see a pickup in the States. So that’s going to be lumpy, so you’ll see that, and we’ll talk about that as the orders come in. But outside of that, security is still driving a lot of it. Cybersecurity has become a huge focus with everybody needing some security solutions, whether it’s backup or data retention. They’re looking for some kind of security play. The majority of the vendors that approached us with new offerings are related to security, as out of those 29 we evaluated, probably two-thirds of them were some type of security platform or product. For those that overlap too much with our existing portfolio, we just pass on.

Vincent Colicchio, Analyst

And Drew, your adjusted SG&A levels relative to AGB were relatively efficient. Is that a sustainable level? Or do you plan to make investments that will bring that to more normal levels?

Drew Clark, CFO

Well, our goal, Vince, as we’ve stated here from time to time, is that we would really like that SG&A expense level as a percentage of AGB to be in that 3% range. Part of that comes with scale and leverage, which we benefited from, from both DataSolutions and from Douglas Stewart Software. So we’ll continue to invest in teams, whether it’s renewal teams or additional salespeople supporting particular vendor markets. But again, that growth in dollars should continue to be flatter than the growth in the AGB rate. So there’ll be incremental dollar growth over time, but as a percentage, it should hopefully continue to stay in that 3% range.

Vincent Colicchio, Analyst

And Dale, will the DACH region become a priority for an acquisition?

Dale Foster, CEO

Yes. I’ve talked about it probably for the last 3 or 4 quarters. It is. It’s based on looking at where vendors are asking us to go from our European operations. Gerard Brophy runs that team based on just the market analysis of GDP and where some of our competitors are not. So we’re going to fill that void with emerging tech that we serve. The big GDP market in the DACH region, we’ve got a great guy on the ground with Martin Bichler in Munich, and we’ll keep expanding there. He will also help us vet through some potential acquisitions we are looking at and have been considering.

Vincent Colicchio, Analyst

Should we expect somewhat of a pause before you do another acquisition here?

Dale Foster, CEO

Yes. No. In 2025, we’ve always said it would be 1 to 2 per year. We’ve financed all of our acquisitions with cash. It really depends on the size. Looking at what we’re planning to do is pretty much the same we’ve been doing over the last 3 or 4 years.

Vincent Colicchio, Analyst

Okay, I will go back into the queue. Nice show. Thanks.

Dale Foster, CEO

Thanks, Vince.

Operator, Operator

Our next question will come from Bill Dezellem with Tieton Capital. Your line is open.

Bill Dezellem, Analyst

Thank you. Let me start with just a small question. You had $609,000 of acquisition-related costs. In this quarter, did that happen to be lease termination, severance, or kind of what were those activities?

Drew Clark, CFO

In terms of the M&A costs?

Bill Dezellem, Analyst

Yes, the $609,000, what were those costs actually for?

Drew Clark, CFO

Predominantly, Bill, professional services associated with the transaction. We had some expense associated with DataSolutions as we wrap up their earn-out. We had some carryover expenses related to Douglas Stewart Software & Services, which we closed on the 31st of July, and then some ongoing investments as we continue to explore opportunities.

Bill Dezellem, Analyst

Great. That’s helpful. And as you think about future acquisitions, is there generally an anticipation of much in terms of severance or closing facilities, etcetera, or are you really just bringing them under your umbrella and letting them run as efficiently as they choose to be?

Dale Foster, CEO

Yes. And that’s a good question, Bill. Each acquisition is unique. Sometimes, the sellers stay on board, and we focus on culture first, then evaluate how they fit strategically within Climb. If we consider our last five acquisitions, there have been operators that have remained on board, but we have never aimed to impose large severance packages as that wouldn’t be a cultural fit. We want to ensure the people running the acquired business continue their work. We aim for a cultural alignment so we can swiftly utilize the resources of the company we've acquired.

Bill Dezellem, Analyst

Dale, that’s very helpful. Do you find in your acquisition process that this mindset ends up being an advantage and that you close more deals because the sellers appreciate that approach compared to a fear of gutting the people part of the organization?

Dale Foster, CEO

Yes. Here’s my perspective, and I am very open with potential targets. Some team members that are still with us from our first acquisition, Carlos runs our North American vendor management team, and we acquired them in 2020 through the Interwork acquisition. I said, listen, just reach out to my three or four people still with us from acquired companies and let them tell you their experience with Climb. I don’t want to be on the call. The challenges sellers face may lead them to seek a path through our company directly, which is advantageous for both sides as we can help accelerate vendor success in their region.

Bill Dezellem, Analyst

Great. That’s very helpful. And then historically, the fourth quarter has been meaningfully stronger than any other quarter of the year. Is there anything about this year that you think will make that different, or would it be reasonable to assume the fourth quarter will be meaningfully larger than I guess this quarter, since this is your largest quarter of the year so far?

Dale Foster, CEO

Yes. The fourth quarter is typically strong because of historical trends. Companies make end-of-year purchases, renewing licenses for the upcoming year. Douglas Stewart’s Q1 is usually one of their lighter quarters as they build up to the education market, which includes 48 states with a fiscal year ending June 30th. You’ll see that they’re preparing for what people are going to buy, and that will pick up during their strong period from June to November. The Q4 is expected to be robust as we prepare for renewals and ongoing arrangements. Most of our renewals tap into an annuity stream for us, whether it’s a SaaS model or recurring license fees. There are no indications of anything different this year; we have solid momentum heading into Q4. We are still improving our ERP systems. Our operational efficiency isn’t where we’d like it to be, but we believe by the end of this quarter, we’ll be aligned going into 2025, nearly on the same page. The good news is all of our companies are on ERP, and by the end of the year, Douglas Stewart will also be integrated.

Bill Dezellem, Analyst

Great. Thank you. And then one additional question, please. For quite some time now, several quarters, there continues to be just general macro questions about whether the market is softening, improving, or holding steady, etcetera. So, would you characterize what you were seeing here in the third quarter and through October, please?

Dale Foster, CEO

So, I’ll take it from the beginning of onboarding vendors. That pipeline has been as strong as ever when vendors engage us. We evaluate whether these vendors seek us out due to stagnation or if they are genuinely ready to build their channel practices. The latter is attractive to us. We’re in the software area, so we are not encountering logistics issues. The market’s long-discussed refresh of endpoint tablets and laptops is anticipated to occur in Q2 2024; it didn’t happen but saw slight recovery in Q3. At a recent event, discussions suggest recovery in Q4, which will bolster our performance. Fortunately, we are not hindered by these delays, as security remains paramount in our industry. Cybersecurity needs persist, whether it’s in cloud solutions or traditional setups.

Bill Dezellem, Analyst

So would you characterize the macro environment as being reasonably strong then just from your perspective alone?

Dale Foster, CEO

From where we sit, it’s still very strong, as reflected in our Q3 results. The expected equipment refresh, once it comes, will only support our efforts, as businesses will re-evaluate their cybersecurity products corresponding to these new deployments.

Bill Dezellem, Analyst

Great. Thank you for taking all the questions.

Dale Foster, CEO

Thanks, Bill.

Operator, Operator

Thank you. It appears we have no further questions at this time. I will now turn the program back over to Dale Foster for any additional or closing remarks.

Dale Foster, CEO

Thank you, operator. I just want to thank all of our stakeholders as we continue to drive Climb forward, maintaining our focus on our core, which is really about being the premier company to launch new emerging technologies, and that’s ever expanding as we are in North America and Europe, and still looking beyond that as well. So, thank you all. I appreciate it.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today’s event. You may now disconnect.