Climb Global Solutions Inc (CLMB) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Wayside Technology Group conference call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session, and instructions will allow at that time. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen this conference is being recorded. I would now like to turn the conference over to your host for today, Ms. Nathalie Turner. Ms. Turner, you may begin your conference at this time.

Welcome everyone. My name is Nathalie Turner, and thank you for joining the Wayside Technology Group conference call. With me today from the company is Simon Nynens, Chairman and CEO; Kevin Scull, Chief Accounting Officer; Dan Jamieson, Vice President and general manager of Lifeboat; Jeff Largiader, Vice President of sales and marketing; and Vito Legrottaglie, Vice President of information technology. Today will be discussing the company's operating results for the quarter ended September 30, 2006. If you do not have a copy of the earnings release that was posted yesterday afternoon, you'll find it at our website at Waysidetechnology.com under our financial SEC filing section.

This detailed financial and operating data are contained in the earnings release and will only be concentrating on highlights of the quarter during the scripted portion of the conference call. As usual, at the conclusion of the scripted portion we will answer questions from our conference call participants. Today's call, including all questions and answers is being webcast live and can be accessed via the website earnings.com. Conference call and the associated webcast contain time sensitive information that is accurate only as of today October 27, 2006. This call is the property of Wayside Technology Group Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Wayside Technology Group Inc. is strictly prohibited.

Finally, let me remind you about forward-looking statements that may be made on today's call. All forward-looking statements that are made in this conference call are subject to risks and uncertainties that could cause the actual results to differ materially. These risks are discussed in our form 10-Q and also in greater detail in our form 10-K. Wayside Technology Group Inc. sees no obligation to update and does not intend to update any forward-looking statements. With that I will now turn the call over to Simon Nynens for opening remarks.

Thank you, Natalie. Good morning everyone, and thank you for joining us. Another great quarter. This is our 13th consecutive quarter of double-digit revenue growth, a tremendous achievement. Kevin will discuss the numbers in more detail. I would like to mention here that our income from operations increased 38% even with a $0.2 million accounting charge for stock-based compensation due to FAS 123(R). On the comparative basis excluding this charge our income from operations would have increased 54%.

Our net income increased 42% is quarter. On a year-to-date basis, both basic and diluted net income per share doubled. Diluted year-to-date earnings per share now stands at $0.50 compared to $0.25 year-to-date last year. For the quarter diluted earnings per share was $0.19 compared to $0.14 a year ago. Net equity stands at $20 million consisting 100% of cash and marketable securities.

Operationally we continue to strengthen our foundation and invest in our future. We released three brand-new websites this quarter, a tremendous achievement. First of all, our new corporate name. In August we officially became Wayside Technology Group Inc. and launched the new corporate Waysidetechnology.com. This website is specifically focused on our partners and investors. Feedback so far has been very positive. If you would like to see any changes please do not hesitate to email us your comments.

In July we successfully launched TechXtend.com, a website designed specifically for our services arm as well as our corporate customers. Then in September we released our updated website for our Programmer's Paradise division, programmers.com a site that now features programmers TV product videos and has done accelerated search capabilities, more content than ever and customized pricing benefits for our best customers. I sincerely want to think all of our employees who helped make this happen; it clearly shows the dedication all of us have to make Wayside Technology Group Inc. a success.

Furthermore we had a successful presentation on September 6 at the Roth Capital Partners New York conference. The presentation can be downloaded from our website Waysidetechnology.com under webcasts and events. The media continue to be positive about our company as we were included in Motley Fool's article about promising stocks that Wall Street ignores. A word about gross margin percentages.

We monitor gross margin as a percentage closely even though our distribution margins are still significantly higher compared to [Lifeboat] line distribution they are impacted by strong growth of lower margin large volume lines such as VMware. Not necessarily a bad thing considering the strong growth of these lines and the fact that we are able to grow our bottom line, net income, faster than our top line, revenue. It is, however, an area that we will heavily focus on in Q4. Possible ways to increase the gross margin as a percentage is to add specialty distribution lines within Lifeboat, as well as even stricter internal pricing controls.

Ultimately, however, it is our objective to grow our net income in terms of real dollars as well as a percentage of net sales. For the remainder of this year we will continue to enhance our marketing and now that we have brand-new websites, invest in search engine optimization and paid keywords. Furthermore, we plan to continue to grow our relationships with our vendors both new and existing in order to offer our customers the latest and greatest in terms of IT products and services. We look forward to a great fourth quarter of 2006.

I would now like to ask Kevin Scull to discuss the numbers for the third quarter.

Thank you, Simon, and good morning everyone. I will discuss our third quarter financial results on a companywide basis and also for each of our subsidiaries. Net sales for the quarter were $48.7 million compared with $35.5 million last year, or a 37% increase. Sales for the quarter for our Programmer's Paradise division were $17.2 million compared to $14 million last year representing a 23% increase. This increase in net sales was mainly a result of strong government (indiscernible) sales, typically at lower margin percentages as well as several large finance deals. This resulted in increased productivity of our account representatives.

Sales for the quarter for our Lifeboat division were $31.5 million compared to $21.5 million last year, representing a 46% increase. The increase in net sales was mainly the results of strong sales growth for virtualization software, as well as strengthening our account penetration. Gross profit for the quarter was $4.4 million compared with $3.9 million last year, a 13% increase. Gross profit as a percentage of net sales was 9% compared to 10.9% last year. Gross profit for the quarter for our Programmer's Paradise division was $2.1 million compared to $1.9 million last year, representing a 9% increase. Gross profit for the quarter for our Lifeboat division was $2.3 million compared to $2 million last year representing a 78% increase. The increase in gross profit dollars and the decrease in gross profit margin as a percentage of net sales was primarily caused by the gross of sales growth within our Lifeboat division.

Gross profit margin for the quarter for our Programmer's Paradise division was 12.2% compared to 13.8% last year. As stated before mainly the result of strong government sales as well as several large deals. Gross profit margin as a percentage of net sales for the quarter for our Lifeboat division was 7.3% compared to 9.1% last year. The decrease in gross margin of our Lifeboat division mainly reflects the competitive nature of our business and a shift in our product mix. We have also won many large bids based on our aggressive pricing.

Total selling, general and administrative, SG&A expenses for the quarter were $3.1 million compared to $3 million last year. This increase is mainly due to the stock-based compensation expense and restricted stock grant, a $0.2 million in an increase in the reserve for bad debt of $0.1 million offset by $0.2 million decrease from employee related expenses. As a percentage of net sales SG&A expenses for the quarter were 6.4% compared to 8.3% last year. The company expects that its SG&A expenses as a percentage of net sales may vary by quarter depending on changes in sales volume as well as the levels of continuing investments in key growth initiatives. We plan to expand our investment in information technology and marketing.

Income from operations for the quarter increased $350,000 or 38% to $1.3 million when compared to last year. Net income for the quarter Compared to our year-end balance sheet the following accounts had significant fluctuations. Cash and marketable securities increased $4.9 mi1lion to $20.2 million, gross profit for the quarter was $4.4 million compared with $3.9 million last year, a 13% increase. Gross profit as a percentage of net sales was 9% compared to 10.9% last year.

Gross profit for the quarter for our Programmer's Paradise division was $2.1 million compared to $1.9 million last year representing a 9% increase. Gross profit for the quarter for our Lifeboat Division was $2.3 million compared to $2 million last year, representing a 17% increase. The increase in gross profit dollars and the decrease in gross profit margin as a percentage of net sales was primarily caused by the [grosses] sales growth within our Lifeboat Division. Net income for the quarter increased $256,000 or 42% to $860,000 when compared to last year. Thus resulting in an earnings per share on a fully diluted basis of $0.19 compared to $0.14 last year.

Now moving onto the balance sheet. Our balance sheet continues to be strong. Working capital is $14.4 million, and we have cash and markable securities of $20.2 million and we have no debt. Compared to our year end balance sheet the following accounts had significant fluctuations. Cash and marketable securities increased $4.9 million to $20.2 million due to the increase in AP offset by the increase in AR from year end levels and cash generated from operations. Accounts Receivable increased by $1.2 million to $22.3 million on increased sales volume in the quarter.

Inventory decreased by [$1 million to $1 million] because we brought in certain products at year end to take advantage of special incentives and discounts offered by the manufacturers. Other assets increased by $2.2 million to $2.6 million mainly as the result of the increase in long-term receivables on deals with extended payment terms. The amounts due in over a year must be reclassed out of accounts receivables to other assets. Accounts Payable increased by $5.1 million due to the increased sales volume this quarter. This concludes my remarks. Simon, back to you.

Thank you. We will now open the session to any questions.

(OPERATOR INSTRUCTIONS) [Michael Kern], Wachovia Securities.

I was curious whether you all had gross margin goals going forward.

As I said on the last conference call it is kind of hard to do so because if there is a large deal -- for instance there is a let's say a $2 million deal that goes to a top public company and that comes in at 5 or 6%, and that comes in at the end of the quarter, should we or should we not take that? We think we should take it if it adds to our bottom line. So we do not have any external guidance in terms of where our gross margin will be.

Very good. And tell me -- this is a new business to me. I'm wondering if there is any seasonality in the business.

Typically the fourth quarter is our strongest. The third quarter is strong in terms of government sales which typically have lower margins. But other than that, it is really a growth kind of business that we are in.

Very good, so you're talking about the fourth calendar quarter which is your next quarter?

Correct.

Finally, it is a curious situation as I read about private equity firms around and how active they are; when I look at your company being valued at $65 million of which $20 million is embedded on the balance sheet. And I also noticed that insider ownership seems to be quite small, it would seem to me that you might be quite vulnerable.

In terms of?

Someone taking over your company.

The Board still would have to approve that.

I understand, but to the extent that votes would take place with private shareholders -- the public shareholders -- excuse me, the acquisition would seem to be pretty interesting to the extent that your entire business is being valued at $65 million of which $20 million is on your balance sheet.

Right. It seems quite an attractive company.

It does indeed, to me. So my question is what do you all feel like as it relates to insider ownership?

We feel that as a public company we are here to please our shareholders both internally and externally, and we're going to do what's best for our shareholders both internally and externally.

Very good and to that end what is the insider ownership?

We do not disclose that information but I can definitely look into that for you.

You have to disclose that information.

I don't have that number as per right now.

Very good. Look forward to seeing the next quarter. Thank you.

[Jim Devlin], [Henley & Company]

A little confusion; I missed the beginning of the call. Everything grew in the business except for the gross margin which came down 17%. Can you kind of retrace where that shortfall came from?

You're saying in terms of gross margin percentage, right?

Yes.

But the gross margin in real dollars increased. The gross margin in terms of percentage declined mainly because this was a strong quarter in government sales, and several large deals that we won in terms of competitive pricing.

Okay, so a lot of the sales -- some of the sales growth I guess then came from government contracts at lower margin?

Yes, as well as large deals at also lower margin.

My question again, --

That's key, Jim, as I said in the generic portion of our call that it is key that we are able to grow our bottom line net income faster than our topline revenue and that is really what we're focused on. We want to grow that bottom line as fast as possible. And as you look at this third quarter we grew our bottom line by 42% and our topline by 38 -- 37%.

It was a --.

That is really what we're looking for.

No, if the business is there and there is an opportunity to make money for shareholders I can't think people would blame you for that.

Absolutely.

I mean the Streets got the stock down I guess about 7% this morning, and my second point relates kind of to the first question the former gentlemen had asked, which is with 30 plus percent of your market capitalization now in cash, I guess at $20.2 million at quarter end, almost $5 a share. I guess people are a little disappointed I guess with the 9%. Do you guys have the capacity, does the Board have the wherewithal to allow you guys to buy back stock opportunistically?

Absolutely, we have approval from the Board. We still have approval from the Board to buy back stock opportunistically and I also think it is a great investment both for external and internal investments.

How much -- I know you guys had a buy back at one time. How many shares could you buy back? What is the Board giving you the opportunity to buy back?

I think we still have half a million left.

Okay, so your window to buy at least 500,000 back opportunistically?

Yes.

Great quarter, look forward to the future.

[Peter Lux], Smith Barney.

How are you guys doing? I look out the window and it's a sunny day in Shrewsbury. A couple things. Dividend. Where do we stand?

We are going to declare a dividend possibly at the end of the fourth quarter.

To be paid in?

The beginning of January, (multiple speakers) the sixth of January. That is (indiscernible) in line with what we did the last couple of years.

Secondly, where is the consultant talent as of now, and where do you think you would like to be a year from now?

In terms of consultants?

Body count.

Body count, we have six consultants right now and we're going to add a seventh person on Monday.

And how strong is that business been?

It has actually been strong, but like I said before, six consultants do not make a dent if you do $42 million -- if your sales are about $49 million a quarter. So what we are looking for, and I've stated this at the Roth Capital Partners conference as well as publicly as well before, is we're definitely looking for acquisition opportunities if they arise in the consultancy business.

You brought up the point that this is one of the favorite stocks that Wall Street likes to ignore. What are you going to do plan wise to get them more exposure?

The same as we did the last three years and that is executing and that way we're going to get positive press; in the second of November I will be going up to New York. I will be on the New Jersey television; newspapers continue to ask us for interviews and we believe that is the best possible press for us. We do not believe in paid research analysts.

I agree with that. Anyway, good job, and I will speak with you down the road.

Great. Thank you.

(OPERATOR INSTRUCTIONS) Michael Kern, Wachovia Securities.

I was curious what percentage of the business in the quarter was government?

That would be non disclose; we don't consider that as a segment that is within the Programmer's Paradise (indiscernible) segment.

Okay, do you disclose how many different departments of the government you do business with?

No.

Do you disclose what percentage of the trailing 12 months revenues went to your largest customer?

We represent our largest customer is CDW, and I believe in the current quarter their overall percentage of net sales was a little over 10%.

Very good.

And accounts receivable are diluted because they pay us in 10 to 15 days. So I think our accounts receivable are about 5 or 6% and their percentage of net sales 10 to 11%.

Very good and is that number moving with CDW?

No, because of the strong growth in our other lines the percentage of CDW is growing very fast for us (multiple speakers) and their overall business is also expanding very fast, their percentage stays relatively the same. If you look at our vendors VMware now represents about 45% of our revenue, and about 26% of gross margin. And that increased from 36% in Q3 of '05 with a 20% of gross margin.

Very good. And is the business such that you try to capture ever increasing new customers, or you rely on recurring revenues from existing customer accounts?

In terms of Lifeboat we mainly rely on further penetrating our existing customer base as the large account resellers in the U.S. are more or less set. It is the large national resellers that are buying most of that main distribution line software. The specialty lines that we specialize in, there we really expand in terms of Lifeboat expanding further into new customers, into the specialty, consultancy houses there. In terms of programmers, we specialize both in further penetrating our current account base by outbound sales reps as well as [arden], that is our plan this year invest heavily in marketing. In keywords online marketing to attract new customers or customers who have not bought from us for a couple years and get them back.

Very good. Would the go forward greatest opportunity be in the Lifeboat division?

Lifeboat is growing very fast. I personally believe if you look at the programmers division over the last couple of quarters, I believe there is significant growth opportunities within that. I also believe there are significant growth opportunities within TechXtend, but within TechXtend it's really a question of how soon can we get these consultants up and running. And if you buy a company, if we would buy a large organization its a question how to -- how to get that -- how to keep management of a possible acquisition target, how would we keep them involved and how do we keep them motivated. If you buy a smaller shop its a question of whether or not it is really going to make an impact on our overall numbers.

And over the past couple of years have you made any acquisitions?

No, we actually sold our European operations in 2001 and since then we have significantly restructured the business with the results that we now report.

Very good. Well thanks very much. This is a very interesting situation.

All right. I appreciate that.

Jim Devlin, Henley & Company.

Just one more quick question. I know that you had talked about six people at TechXtend and adding a seventh.

That is consultants, and in terms of overall TechXtend, we have about 15 people working for TechXtend, and we do not disclose the overall salespeople. But just that division 15 people; what we did is we transferred corporate account sales representatives from Programmer's Paradise who were mainly focused on corporate lines of software and hardware over to TechXtend. Because that is really what TechXtend is, the overall inclusive offering of hardware, software and the consultant future assistance going along with that.

I know on previous conference calls we've talked I guess about TechXtend; the E-commerce initiative and re-entering Europe as all three opportunities to increase your margins. I know they are all in their infancy. When would we anticipate or when do you think we should start bearing some fruit on the margin side from each of those initiatives?

We already are, Jim. It is like I said, it is really a question of how fast do we grow in the other lines of business. And that is where we are growing very fast within Lifeboat with a 46% increase in sales. That is really -- you cannot keep up with that in terms of specialty lines. So again, what we really look forward to is growing our net income line and all the initiatives are definitely helping us towards that, and try to grow our consultancy business and we know as well, I mean that is very important on Wall Street, but then internally as well; it's gross margin. It is not the revenue, its all gross margin. So we are definitely focused on increasing that gross margin number as fast as possible and consultants are one way to get us there.

Sure. And on the Ecommerce side, you guys launched how long ago?

In July, in September 18, we launched programmers.com the new site. We always had a commerce side but we believe the current site is much better in terms of content and we are going to invest in -- next week we're going to start with search engine optimization, heavily invest in that. Paid keywords, so I would really say that's starting this quarter.

And who will your partners be on that like Google, Yahoo, does it matter?

Yes, Google, Yahoo, Overture, the usual soft specs there.

And since you've launched your Ecommerce function have you got any feedback from customers, good, better, different?

Actually with every order that we send out now you also receive an email that asks you three simple questions; did you like your interaction with your account rep, with the website. Second question is would you rate your overall experience? And the third is, would you come by to us or do you have any additional comments. And the feedback so far has all been -- you can rate us one to five -- the feedback on the website so far has all been five and people really are impressed with our new website.

And obviously we are seeing some pretty good pickup on the top line. How would you say since you've launched the Ecommerce, has it increased your Web business?

Not significantly yet, but it is very early to say that.

Again, thanks for the feedback.

All right. You're welcome.

I am showing no further questions at this time, sir.

Good, I want to thank everybody for their continued support for our company and again I will look forward to a great fourth quarter of '06 and hopefully talk to you in January. Take care.

Ladies and gentlemen, this concludes today's conference. You may all disconnect, and thank you for your participation, and have a nice day.