Climb Global Solutions Inc (CLMB) 2006 Q4 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 a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. [Natalie Turner]. Ms Turner, you may begin your conference at this time.

Thank you, Christopher. Welcome everyone. My name is Natalie 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 we will be discussing the Company's operating results for the quarter ended December 31, 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 filings section. Since detailed financial and operating data are contained in the earnings release, we 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. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today January 26, 2007. 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. 2006 was another great year for us. Since 2003 we have shown tremendous growth. Q4 of 2006 marks our 14th consecutive quarter of double-digit revenue growth. Our compounded annual growth rate in terms of revenue since 2003 is 27%. That is four solid years of consecutive revenue growth.

In terms of income from operations we did even better. Our compounded annual growth rate for the last four years is 56% per year. In 2006 both revenue and income from operations grew even faster than these compounded annual growth rates. Revenue in 2006 is up 32%, and income from operations is up 74%. We've achieved this growth by diligently focusing on our financial goals, to increase income from operations by increasing our gross margin dollars while improving employee productivity. In fact, through improvements in employee productivity we were able to add every dollar that we earned in additional gross margin dollars directly to income from operations.

To lower SG&A costs while growing revenue by $45 million or 32% is the best sign of this improved productivity. Let's review our operational progress in 2006. In March we started to reports our financial reports by division thereby enhancing the meaningfulness of our financial results for the investment community. In April we implemented our first EDI solutions for our largest customers of our Lifeboat division thereby enabling our sales executives to shift their focus from order entry to customer service and expanding our product offerings to these same customers.

In June we received hard-earned recognition by two major publications, BusinessWeek and Fortune Small Business magazine. We were number seven on Fortune Small Business' 100 fastest-growing companies list and number eight on BusinessWeek's hot growth 100 list.

In June we asked for and received the approval from our shareholders to change our corporate name from Programmer's Paradise, Inc. to Wayside Technology Group Inc. We officially changed our name in August and launched a brand-new corporate website. We also changed our ticker symbol as we started trading as WSTG on NASDAQ.

In July we launched TechXtend, our new division focused on consultancy and IT solutions for our corporate customers. We also launched a brand-new website for this division.

In September we launched a completely redesigned website for our Programmer's Paradise Division; the site now features Programmer's DV product videos, product reviews and enhanced and accelerated search capabilities, more content than ever and customized pricing for our best customers. Feedback from our customers was and is very positive.

In December we received an invitation from NASDAQ to be upgraded to the NASDAQ global market. We accepted the invitation and started trading on NASDAQ's global market on December 22 with the same symbol, WSTG. There were numerous other improvements. We continued to improve our catalogs, mailing plans e-mail, newsletters and marketing in general. We've invested significantly in information technology including investing in top consultants and additional employees for our IT department.

We have monthly employee meetings in which we share our progress, our mistakes and our successes with all of our employees. We all continue to learn from these meetings. Employees elected an event committee responsible for corporate outings. We upgraded our offices, invested in flat screen monitors and free dress shirts with our logos for all of our employees.

Last but certainly not least, we significantly reduced and continue to reduce our impact on the environment. We no longer have vendor machines, paper cups, plates and plastic dinnerware. Instead we use durable dinnerware and cups, serve free fruit and organic drinks. We implemented paperless invoicing, reduced the amount of printers, print far less and if we print, we print on 100% recycled paper. By doing so we reduced our waste significantly. Furthermore we use ecological products as much as we can and our catalogs are now printed on 100% recycled paper.

We're also looking forward to installing solar panels on the roof of our corporate headquarters 2007. Needless to say that everyone here at Wayside Technology Group is very proud of these results. We are excited about our future.

Kevin Scull will now report on the financial numbers. Kevin?

Thank you, Simon, and good morning everyone. I will discuss our fourth-quarter financial results on a companywide basis as well as per division. Net sales were $56.8 million compared to $42 million last year, a 35% increase. Sales for our Programmer's Paradise division were $11.8 million compared to $13.7 million last year representing a 14% decrease. This was mainly the result of the fact the year ago quarter was positively impacted by key upgrade cycles at several top publishers such as Microsoft and Borland.

Sales for our Lifeboat division were $45.1 million compared to $28.2 million last year representing a 60% increase. Mainly the result of strong sales in our expanding virtual infrastructure centric business, the addition of new vendor lines as well as the strengthening of our account penetration.

Gross profit was $4.7 million compared to $4.3 million last year, a 9% increase. Gross profit as a percentage of net sales was 8.2% compared to 10.2% last year. Gross profit for our Programmer's Paradise division was $1.6 million compared to $1.9 million last year representing a 14% decrease.

Gross profit for our Lifeboat division was $3.1 million compared to $2.4 million last year representing a 27% increase. Gross profit margin for our Programmer's Paradise division was 13.7% basically unchanged from last year. Gross profit margin as a percentage of sales for our Lifeboat division was 6.8% compared to 8.5% last year. The increase in gross profit dollars and the decrease in gross profit margin as a percentage of net sales was primarily caused by the aggressive sales growth within our Lifeboat division.

Distribution margins are typically lower than reseller margins. Lifeboat represented 79% of our sales in the quarter compared to 67% last year. VMware, our largest vendor, accounted for 53% of our sales and 29% of our gross profit for the quarter compared to 37% of our sales and 16% of our gross profit last year.

Total selling, general and administrative SG&A expenses were $3.2 million basically unchanged compared to last year despite a $0.2 million compensation expense related to the implementation of FAS 123(R). FAS 123(R) relates to the accounting treatment for restricted stock as well as options. As a percentage of net sales SG&A expenses were 5.6% compared to 8.3% last year. Direct selling costs were $1.4 million compared to $1.3 million last year, a 7% increase.

Total direct selling costs for our Programmer's division were $0.7 million compared to $0.9 last year representing a 14% decrease mainly the result of fewer sales staff as we focused on increasing the productivity per sales executives. Total direct selling costs for our Lifeboat division were $0.7 million compared to $0.4 million last year representing a 49% increase mainly the result of hiring additional sales staff to support the fast growth in our Lifeboat division.

Income from operations, as we increased gross margin dollars while keeping SG&A constant, we improved employee productivity significantly. As a result income from operation increased $357,000 or 32% to $1.5 million basically equal to the increase in gross margin dollars.

Income taxes in the fourth quarter of 2005 were reduced by $0.9 million as a result of the elimination of a deferred income tax valuation allowance. This allowance was deemed no longer necessary due to our strong financial performance in 2005. As a result income taxes in the fourth quarter of 2006 compared to 2005 increased by $1 million net income. Even though we increased our income before income taxes by $0.5, the $0.9 million reduction of income taxes in Q4 of 2005 caused our net income to decline. Net income was $1 million compared to $1.6 million.

Since we utilized our net operating loss carryforwards in 2006 the income taxes in 2006 were a non-cash expense. Our net operating loss carryforwards now amount to $1.7 million. As a result we expect to start paying income taxes again in 2007.

I'm now moving onto the balance sheet. Compared to our year end balance sheet, the following accounts had significant fluctuations. Cash and marketable securities despite the fact that we paid 2.2 million in dividends in 2006, we were able to increase cash and marketable securities by $5.9 million to $20.9 million mainly as a result of cash generated by operations and the fact that income tax is a non-cash charge because of utilization of net operating loss carryforwards.

Accounts receivable increased by $6.9 million to $28 million on increased sales volume. Other assets increased by $2.5 million to $2.9 million mainly 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 receivable to other assets.

Accounts payable increased by $9.6 million to $35.3 million due to the increased sales volume is quarter. Equity now stands at $21.3 million, a $3.3 million increase. Primary earnings per share amounted to $0.24 per share for the quarter and $0.78 per share for the year.

This concludes my remarks. Simon, back to you.

Thank you. We will now open up the session for any questions you might have.

(OPERATOR INSTRUCTIONS) Steve Emerson with the Emerson Investment Group.

First of all congratulations, great quarter. I did a little back of the envelope earnings calculation and I just I got $0.27 versus $0.16 -- $0.17 if I use non-GAAP and use the 4.6 million fully diluted shares in both years. Am I correct?

You actually adjusted the 2005 numbers to include income taxes?

Yes.

Okay, yes.

And I would suggest that you followed the convention of other tech companies and in your text include non-GAAP.

The issue with that is mainly with our auditors if you do include non-GAAP there are certain requirements that we're still discussing whether auditors whether or not to include that in our 10-K. But it is definitely a good recommendation. We're thinking about that.

Okay. And I missed a part of your text, your intro. Give us a flavor for going ahead business, gross margin trends, percent VM, if you can help us out a little.

You mean the my intro comments?

Well, I don't know what -- I'm just trying to get a flavor unless you fully covered this in your intro and I will just get back in queue and listen to the replay.

I think we did. I mean overall like I said if you look at our competitors, CDW growing, CDW grew 7% excluding Verve. They had a declining profit. Insight was up 8%; [Cinex] was 9%; PC Connections did well but that was including the Amherst acquisition.

If you look at our basically our core competition including the distributors, we've done very, very well. For Lifeboat to go up 60%, for Programmer's to hold its ground while we restructured it, the division and upgrade our websites, I think we've done very well. And that shows in our results so we are extremely pleased with the results.

Is VMware a large portion of that? You bet. Do we ride that wave, virtualization wave? You bet. There's a lot of people who want to ride that wave with us. We're fully taking advantage of the virtualization wave. We expect to join to help VMware riding this wave for many years to come. They expect that the implementation of virtualization software has just begun. We're extremely well positioned to take full advantage of this upgrade cycle. And we're excited about that. So that will be my maim comments with regards to the future as well as our prior year performance.

And if you look at our stock price we started the year at $11.96. We ended at $15.12; that is an increase of $3.16 or 26.4% up. In addition to that 26% increase in share price, we paid out dividends. We paid out a total of $2.2 million in dividends. So I would say an extremely good year.

At this point what percent of virtualization revenue and/or gross margins are the ancillary products? And could you discuss your service, your installation, how far along you are and how that initiative is going?

Steve, we are excited about our consultants. We keep adding consultants. But honestly we cannot keep up with the growth of Lifeboat. That is also the reason that our gross margin percentage went down compared to last year. That is not a bad trend for us because again we take those gross margin dollars down to our bottom line. The Lifeboat is just growing so fast that the positive impact of adding higher margin consultancy and selling higher margin products on the Programmer's side just cannot keep up with that.

That is a trend we know and I think that that trend will continue. But again our objective, our financial goal number one is to increase our income from operations. So if you look at it that way, we've done well and we expect to continue to do well.

Thank you.

[Jim Delvin] with [Hanley Company]

Good morning, guys. Great quarter. Again it's a little fluky. I know you guys had the tax consequences on a comp basis in the same quarter last year.

So I mean just to reiterate, this apples-to-apples was like a $0.27 quarter versus $0.16?

Our pretax income went up 81% because our income -- actually our interest income went to $700,000 compared to $300,000 last year for the full year. So exactly. We did tremendously well. It's just that income tax treatment last year. Which by the way is a good factor; it shows that we have a lot of confidence in the future.

Okay, that is fine. The second thing, as far as the EDI, the web based initiatives that you guys have taken a hold of I guess. Have you seen any uptick in e-commerce business since you've undertaken those initiatives?

Oh absolutely. I mean what happens with EDI is it started up slow. I would say 20 to 30% of the orders went through EDI. Then as our customers get more acquainted with the EDI systems, the percentage of orders going through EDI goes up I think we are now at 50% to 60% on average. Is that correct Vito?

Yes, 60% of our orders right now are coming through EDI.

Yes. So what that does is actually enhances the productivity and enables these sales executives that we have in Lifeboat to shift our focus from being busy with operational order entry work to a sales consultant approach in terms of adding new lines, talking about customer service, service levels, discussing new possibilities for our company. And that has worked very well and I think hence the 60% increase in Lifeboat sales.

I think maybe more -- like maybe part two of that question might be obviously most businesses operate on a 9 to 5 type of business day. I think maybe more of the question is say from 5 PM to 9 AM, have you guys been seeing a lot of overnight business that maybe you would not have seen hadn't you driven the EDI initiative?

No, if you look at the breakdown of orders on a daily basis, Jim, you see orders it's about 5% to 6% that we get in prior to 9:30 because most of the orders that are entered are entered by purchasing staff and when they come in, they first have to get their cap of coffee, check their e-mails from yesterday and then basically start placing orders. The busiest hour for us is 5:30 to 6:30, at the end of the day. After that it really dwindles down fast. I would say the last orders we get in are at 8 or 9 o'clock for EDI and that is last. We don't get any orders in during the night.

Okay. You had also previously announced some initiatives to taking a look at and potentially procuring some business outside of the U.S. I guess vis-à-vis Europe.

Yes, what we are looking for as you see and it's not a surprise, CDW and Insight and all the mainstream resellers are being faced with pressure on their gross margin and they are offsetting that by adding consultancy into their mix. We've done so as well but like I said before one, two, three, five, six consultants cannot offset the impact that especially Lifeboat has on our overall gross margin percentage. So what we are looking -- there's nothing concrete yet but it's definitely we're looking around to see if there are any interested partners in the consultancy space that would like to join our company.

Okay, so that would be some kind of either acquisition or some kind of merger on equal terms as far as that would be concerned?

Yes, really depending on what kind of company -- we haven't crossed that bridge yet. But it is definitely our intent to start looking around for those opportunities as we have before.

Okay. My last question I guess as far as maybe looking at acquisitions or what not, the war chest at the end of the quarter, cash and marketable securities was about how much?

(indiscernible) [8 million]. It's about 95% of our equity. We are extremely, extremely well positioned for that -- 90%, 95% of our equity is cash.

All right. And one last question. The liquidity in the stock I seem to get a lot of questions asked of me. Have you guys ever looked at potentially doing some kind of a stock split?

Yes, actually we did and we continue to discuss that. The question is will it open up liquidity or not? Some people would like us to do a tender offer to start buying back shares, so there is a lot of different opinions there. But there's nothing concrete.

Okay. What is it $20 million -- I guess maybe about one-third of your market capitalization is cash and marketable securities, is that about right?

Yes, correct.

Okay. All right. Very good, guys. Again, congratulations, great quarter and keep up the good work.

[Peter Lux] with Smith Barney.

Jim, Simon I just want to say hello. It has been a couple of weeks. You know what happens.

Yes, Peter, welcome back.

I'm back and I'm going to come knock on the door in the next week or so to see the new digs.

There you go.

There you go. So good quarter, keep it up. I know nothing specific and I just wanted to -- you and I have always talked about the consultant business. It seems that you did bump the number of consultants in the quarter.

Absolutely, and we continue to add them and Computer Associates we added a consultant who is focused on high-end technical training solutions. It does very well so we are excited about that. Again I don't think that we will -- have had a meaningful impact on our gross profit percentage as an overall company. It doesn't mean by the way that we're not excited about the consultancy business.

That seems to be the area they are looking to expand acquisition-wise though?

Absolutely, absolutely.

VMware is obviously doing a homerun for you guys. Are there any other exclusive kind of relationships that you might look to add in that vein over the next couple of quarters?

We actually have added I would say about five to ten exclusive ones in 2006, smaller ones though.

Smaller ones, right.

Nothing with the impact of something like VMware though?

There is a couple of companies that have really made an impact on it. The reason I don't want to discuss this is I don't want to alert our competitors -- competitive friends from our distributors. It's definitely helped business in 2006. And Dan would like to add to that.

What we're trying to accomplish there is we had some real success in the virtualization space and obviously we're adding companies that augment and enhance VMware's tools there but also we focus on security space as well. Moreso than ever we find that the virtualization and the security spaces are beginning to meld together in importance. So we are making strong initiatives in both those areas.

Security being a really hot topic probably?

Yes, it is. And again it's aligning again with the explosive virtualization space. So we are right in the forefront of both of those areas.

And finally, I know the margins might not be there but you guys excited about the new Microsoft products and how you might maximize that?

Absolutely. I think Jeff -- Jeff, would you like to comment on that?

Yes. Of course we're always excited when Microsoft upgrades or whatever they do with a new platform leaves opportunity for our Programmer's Paradise division as full key publishers will then work to come out with new tools. And we are always at the forefront for adoption by professional software developers.

So, Simon, it's good to talk to you again. We'll see you down the road.

Okay. Welcome back, Peter.

You got it.

[James Stone] with [PFK Advisors].

Thank you very much and don't think there's any need for me to join the cheer crowd there. They've done a great job in passing those comments on. I did have a question in terms of trying to put my model together for forward. I know you don't do the forward forecasting. But I wonder if you could talk a little bit more about what has happened over the last couple of quarters? I'm looking particularly at the Programmer's Paradise in the September quarter -- what caused that bubble?

And then also in the Lifeboat for the fourth quarter, is there anything unusual going on or should we in terms of building models look at normal seasonality going forward?

We don't give any forward-looking guidance but I can definitely comment on the previous quarters. Dan, maybe you would like to take the Lifeboat question in the fourth quarter?

Sure Simon, thanks. I think in the fourth quarter what we've done as I mentioned in the earlier question is we've worked to add complementing lines that enhance the strong relationships we have in the virtualization and security space. The success we've achieved really is Lifeboat has a value proposition that combines knowledgeable account executives with extraordinary customer service. So that is resonating deeper and deeper into the channel.

As we add more lines in these spaces we're able to give more comprehensive long-term far-reaching solutions to our customers who then can give that -- pass that onto their end-user customers. So I think we are seeing a great success in those areas as well.

But if you look at like June and December already ended for VMware of their huge cycle for VMware, so we typically see a spike and we have seen a spike in the last year in those two periods, in June and December.

Most definitely, most definitely.

And in terms of Programmer's, I think there was more or less a shift in business from Q3 to Q4. If you look at it year to date it was stable, Programmer's, again our objective is to grow that business at high margins and to more specifically enhance the income from that division the contribution toward our company.

The third quarter is definitely affected by our government business. A significant amount that flows through our GSA business and then in the fourth quarter we were impacted somewhat negatively by the fact that the previous year Microsoft rolled out some IDE upgrades and Borland as well in that quarter. And then finally there was a shift in some of OEM business in the fourth quarter from our retailer business into distribution.

Thank you, Jeff.

In terms of the IDE electronic order entries, isn't that also a double-edged sword that when people call in you develop a human touch, if they just key it in on a computer clearly they can easily switch the end address?

Yes, and a very good point. I'm glad you brought that up because most of our competitors in the distribution space see this as a great way to save costs and will actually follow that up with a call center somewhere outside of the U.S. And think that they no longer have to be -- have to talk to people. We are one of the few distribution partners that will actually go out and visit our customers in that space. We do not let our salespeople, sales executives in Lifeboat go. We do not restructure them. What we ask them instead to do is we train them and they upgrade themselves to become really customer relation managers with that customer. And that has worked very well for us.

Have you seen any customer slippage because of the electronic entry?

Oh no, no. Everybody is excited about that. Dan?

Thanks, Simon. On the contrary really again what it has really done is it has freed up our rest to reflect what our true value proposition is. And again as we have a focus on complex products, we understand the products that we sell and we're able to expound on those and also we can get into accounts. We can build out accounts, penetrate, add different lives, offer more comprehensive solutions to our customers and that is working out real well for us.

And last question, because I've been around doing forecasts since we didn't have computers, there's an old criteria which I use which is the incremental operating margin, that is how much you bring down operating income for each additional dollar. And I noticed that that has been slipping a bit and it is now down at about 2.5%. It means you are doing a heck of a lot of work to bring down the next dollar. And I'm wondering if you are following that criteria? And if so if you're looking at how it can be increased?

No, I would have to disagree with that. I think we took down every single dollar that we increased our gross profit in this year down to our bottom-line income from operations. So we enhanced our productivity per employee enormously. If you look at our gross profit, it went from 14.9 to 16.9. All of that we took down to income from operations from 2.8 to 4.8. So we took the full amount of the increase in gross margin down to our bottom line.

As I said, I look at it a little differently. I look at the incremental revenue which was about 8 or $9 million and you took down operating income about $300,000. So that is about a 2.5% incremental margin.

If you look at us on revenue, the big factor there is that we don't look at revenue. What pays our bills is gross margin. Gross margin dollars is what we are in it for.

Okay.

And what you've seen there is that is the slippage in terms of gross profit percentage. Where the gross profit percentage last quarter -- in the less quarter of '05 was 10.2 and in this quarter it was 8.2 and the big reason there being that Lifeboat is such a huge growth factor in Q4. As I said before that does not worry us because we take those extra dollars down to the bottom line.

Okay, thanks very much. I hope you do the same this year as you did last year. It would make us all very happy.

Thank you. I appreciate that.

Jim Delvin.

Just one quick follow-up question regarding Microsoft and the Vista launch. We've been talking about it and I guess Microsoft has been delayed for quite a period of time. Exactly how do you see you guys fit in or what is the upside in this launch kind of in broad terms for Wayside?

Jeff, do you want to comment on that?

Yes, sure. The companies that produce software development tools benefit whenever there is a platform change because so much of the software has to be reworked for a new platform. So we benefit as those new tools come to market and as the demand increases over time as corporations decide to shift from one platform to another.

It's not so much the initial push for Microsoft. I think we had a survey; the data says about 12% of customers expect to upgrade to AltaVista some time this year. For us it's more of the investment surrounding the AltaVista, the surrounding products that now are being looked at to enhance that.

Agreed.

Do you want to add to that Vito?

No, no.

Okay. Does that answer your question, Jim?

So basically Vista would spur more development in the tools market then?

Yes, exactly.

Okay, great, thanks guys.

(indiscernible)

Thank you for taking my question. Simon, I was wondering if you can throw some light on the growth in the Lifeboat business? What was the revenue growth came from VMware?

We in the fourth quarter of '06 VMware including Programmer's Paradise -- those are the public numbers that we can share. It was 53% of our overall business, VMware in percentage of sales. If you look at it on a margin basis and that is the fact we look at is 29%. If you look in Q4 of last year, 37% were VMware sales. That includes the Programmer's Paradise and the TechXtend business. It was 16% of gross margin.

Okay. Could you update us on the status of VMware vis-à-vis with -- I understand that virtualization software is included in Vista product and there is some (indiscernible) product that is coming out. How is the competitor landscape there? Are you feeling any of that?

No, it is just -- no, we don't see that, no.

Okay. One other question, follow-up question to the previous question about risk I believe and the effect on Programmer's Paradise and the tools you sell through the channel. Partly the reason of Programmer's Paradise having seen no growth in the last year is it due to Vista release coming up and maybe customers holding off buying? Is that a possibility?

It could be. It's also I think it's I think it is more than that. Jeff, you might want to comment on that.

Certainly that may have some impact and so that would bode well as we head into the new year. But there are other issues that we're dealing with in terms of open source and some of the things that you mentioned. But we're taking steps to move in a direction where we are providing more services for our key lines and broadening out our depth in support of those. And we foresee that that is going to be positive for us in the future. And we also have some things we're working on related to our website that will particularly help some of the smaller publishers that we work with that contribute high margin.

Yes.

Okay. You mentioned there is some interest in the security business in the TechXtend space. Could you give us some areas where you are seeing some progress, what particular products?

Like I said before we're very excited about Computer Associates, in terms of TechXtend and in terms of the consultancy. We can really -- what we really want to do with TechXtend is make sure that we don't become general consultants who do a little of everything because that competition in that market is tremendous. There is actually high margins but there is low profitability in the general consultancy business. So we want to make sure that we do the same there as we have done in Programmer's and as we have done in Lifeboat; make sure we are a niche player who thereby can carve out a niche and grow in that niche. That is what we've done with Lifeboat and that is what we have done with Programmer's. And that is what we want to do with TechXtend.

Do you have any plans to provide services that are open source products through TechXtend?

Yes, yes. We take all sorts of services into account. But again it has to be a niche market.

Okay. I don't know if you mentioned this. How many consultants do you have now at TechXtend?

We have about eight.

Okay. Thank you, gentlemen. That is all I have.

(OPERATOR INSTRUCTIONS) Steve Emerson with Emerson Investment Group

Gentlemen, are you getting closer to when you might make a range of -- of guidance range as you've matured and now you have momentum, it would seem to be appropriate?

Actually I always look at that as we have discussed in the past as well, Steve. More and more companies are moving away from forward-looking guidance. It is simply is just not a win-win situation. If we start looking giving forward-looking information there will be a quarter that we miss it by $0.02 or by one-third of 1% and somebody will be upset about that and it's only cause for litigation and we just do not see the benefits of that. I stand firmly by our previous point of view and that is execution is what counts. The results are what is going to drive our share price.

And just this morning I was looking on Stock Screener on NASDAQ and I typed in the results for our company. There are only three companies popping up with our results. We're the largest with the largest market cap, the largest revenue, the fastest revenue growth. I'm extremely pleased with what we have done. And more and more companies are starting to look at us right now because of our performance not because the fact that we gave forward-looking guidance.

Excellent. I was a little confused by your comments about VMware growth. I think I heard you say that VMware was 29% of gross profit versus 34% last year --

Oh no, no. Sorry. 29% gross profit in the fourth quarter of '06; 16% of gross profit in the fourth quarter of '05.

Okay. And what percent of revenues each period?

53% of revenue in Q4 of '06; 37% of sales in Q4 2005. Again that is not only Lifeboat; that includes Programmer's Paradise and TechXtend.

Okay, now, is that about the same or is that a greater growth rate in VMware revenues than VMware itself is showing?

No, it's slightly below VMware's overall growth and the reason for that is that they take the large deals direct.

Okay. Has it stabilized in terms of what they are doing direct?

Yes, I mean their model is not changing. And by the way our growth has followed VMware more or less the same ratio to what they grow to what we've grown with VMware. So this model has been the same for the last couple of years and we see no changes on that.

And your outlook for gross margins this year, do you expect another large shrinkage or moderate shrinkage from these levels? What is going on?

Actually in terms of gross profit percentage?

Yes.

It is a factor. I don't take that as the number one factor. What we look at is gross margin improvement in dollars. Again if there is an EDI opportunity with one of our large customers, corporate customers in Lifeboat such as a CDW, Insight, PC Connections or any of the large corporate resellers, as they come to us with a low percentage EDI position, we will definitely take that because it will go down to the bottom line (multiple speakers). Minus the commission. So, yes, we will definitely do that.

So we don't actually -- do we have it in our internal numbers? Yes, we do have gross profit percentages in our budget for next year. The most important one is gross margin dollars.

Okay. Can you discuss the environment for you making acquisitions? And can you characterize what you are looking for at this point?

No, not at this point. Again like I said before it is nothing concrete otherwise we would definitely file the appropriate documents with the SEC. But we are definitely looking around as we have. But it is definitely in the consultancy area.

Excellent. Thank you again.

More than welcome. Have a good weekend, Steve.

At this time there are no further questions. Please continue with any closing remarks.

Thank you. I would like to thank everybody for their continued support in 2006 and as I said before, we are excited about our future. Hope to talk to you next quarter.

Ladies and gentlemen, this concludes today's conference call. You may disconnect at this time and thank you for your participation. Good day.