Climb Global Solutions Inc (CLMB) 2007 Q2 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, Sayid, and good morning, everyone.

Welcome to Wayside Technology's second quarter 2007 earnings call.

Before turning the call over to Simon Nynens, the Company's Chairman and CEO, I'll start with the customary cautionary language and comment about the webcast for this earnings call.

We released earnings for the second quarter at approximately five p.m.

Eastern time yesterday, July 26, 2007.

The earnings release is available on the Company's Investor Relations website at WaysideTechnology.com.

Today's call, including all questions and answers, is being webcast live and can be accessed via the website Earnings.com.

A rebroadcast of this call will be available at WaysideTechnology.com.

This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, July 27, 2007.

A detailed discussion of risks and uncertainties are discussed in our Form 10-Q and also in greater detail in our Form 10-K.

Wayside Technology Group, Incorporated, sees no obligation to update and does not intend to update any forward-looking statements.

Now I would like to turn the call over to Simon.

Thank you, Natalie, and welcome, everyone.

The second quarter of 2007 was another solid quarter for us.

We successfully continued to execute our strategic business plan in the second quarter.

Sales were up 6%, and earned net income was up 23%.

Year to date, our revenue is up 18%, and our net income grew at more than twice that rate, 42%.

In the second quarter, our net income showed continued excellent growth.

Sales growth was 6%, not growing as fast as in previous quarters.

However, in accordance with our business plan, we consciously decided to not pursue ultra-low margin revenues.

That being said, as a percentage of sales, income from operations was 3% of revenue versus 2.7% last year, a great achievement.

We have, and we will continue to focus on growing our business in a profitable way.

Internally, we plan to do so by growing our gross margin dollars.

We plan to continue adding new software lines to our line card and improve the productivity of our account executives.

Externally, as we've stated before, we continue to look for possible acquisition targets in the consultancy and service area.

We have now engaged an investment banker to assist us in identifying and exploring potential acquisition opportunities.

In order to not limit us in terms of coverage, we have decided to not publicly disclose the name of the investment banker.

Furthermore, we decided to increase our dividend this quarter from $0.14 per share to $0.15 per share, a 7% increase.

I want to thank everyone, especially our Lifeboat team, for a solid performance this quarter.

We continue to strive to add value to the software distribution channel and show our sales and marketing capabilities to our vendors.

We are proud of our performance and 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 second quarter financial results on a companywide basis as well as per division.

Net sales were $44 million compared to $41.4 million last year, a 6% increase.

Sales for our Programmer's Paradise division were $10.4 million compared to $12.5 million last year, representing a 17% decrease.

This decrease in net sales for our Programmer's Paradise division in the second quarter of 2007 was mainly due to increased competition in the direct-to-end-user portion of our business.

Sales for our Lifeboat division were $33.7 million compared to $29 million last year, representing a 16% increase.

This increase in net sales in the second quarter of 2007 was mainly the result of strengthening of our account penetration, the addition of several key product lines, as well as our continued focus on the expanding virtual infrastructure-centric software market.

Canadian sales were $5.5 million for the quarter, or 13% of overall sales.

Gross profit was $4.3 million compared to $4.1 million last year, a 7% increase.

Gross profit as a percentage of net sales was 9.8%, unchanged compared to last year.

Gross profit for our Programmer's Paradise division was $1.3 million compared to $1.7 million last year, representing a 23% decrease.

Gross profit for our Lifeboat division was $3 million compared to $2.3 million last year, representing a 29% increase.

Gross profit as a percentage of sales for our Programmer's Paradise division was 12.9% compared to 13.9% last year.

Gross profit as a percentage of sales for our Lifeboat division was 8.9% compared to 8% last year.

Distribution margins are typically lower than reseller margins.

Lifeboat represented 76% of our sales compared to 70% last year.

VMware, our largest vendor, accounted for 36% of our sales and 19% of our gross profit compared to 47% of sales and 20% of gross profit last year.

Total selling, general and administrative--SG&A--expenses were $3 million, up slightly compared to $2.9 million last year.

As a percentage of net sales, SG&A expenses were 6.8% compared to 7.1% last year.

Direct selling costs were $1.4 million, basically unchanged from last year.

Total direct selling costs for our Programmer's Paradise division were $0.7 million compared to $0.8 million last year, representing an 11% decrease, mainly a result of fewer sales staff as we focused on increasing the productivity per sales executive.

Total direct selling costs for our Lifeboat division were $0.7 million compared to $0.5 million last year, representing a 32% increase, mainly a result of hiring additional staff to support our continued growth of our Lifeboat division.

Income from operations.

As we increased gross margin dollars while keeping SG&A costs that we improved employee productivity significantly.

As a result, income from operations increased $200,000, or 18%, to $1.3 million.

Our net income increased in second quarter of 2007 by $180,000, or 23%, to $1 million.

Our primary earnings per share were $0.22 in the second quarter of 2007 compared to $0.19 last year.

On a fully diluted basis, our earnings per share were $0.20 compared with $0.17 last year.

Compared to our year-end balance sheet, the following accounts had significant fluctuation.

Accounts receivable decreased by $6.5 million, and accounts payable decreased by $9.8 million from year end, since the fourth quarter is generally our strongest and these accounts closely correspond to our sales pattern.

Working capital at the end of the second quarter was $19.8 million compared to $16.5 million at year end.

Equity now stands at $24.1 million, a $2.8 million increase.

This concludes my remarks.

Simon, back to you.

Thank you.

We will now open it up for any questions.

Operator?

Thank you, sir.

(Operator Instructions.) The first question comes from Alan Weinfeld from Henry and Company.

Hi, guys.

Was there a deliberate move in the quarter to go for more profitable sales and higher margins at the expense of maybe a little lower top line?

Yes, and actually that has been our strategy since January of 2006 last year.

What happened this quarter is that people chased high revenue deals at extremely low margins, and that's something that we have not and will not chase.

So it is actually, definitely correct.

And if you look at Lifeboat's gross profit, it went up almost a point in Lifeboat.

Great.

Thanks.

You're welcome.

Our next question comes from Rich Google from Needham.

Yes, hi, good morning.

Just following up a little bit on that ultra-low strategy, had to avoid those sales, is that primarily more on the Programmer's side that you see those types of transactions that you're avoiding?

Is it more one side than the other?

No, I think it's also happening in the Lifeboat side.

Some of our competitors have showed not significant growth this quarter in terms of income, and I think they decided for whatever reason to chase revenue at all costs, and that's something that I've said before, we run this as a private company, so to say, we heard you in terms of what's important for this Company, and that's to increase net income.

That's ultimately what counts.

We want to increase that net income number.

And that's what we did.

And we could, we could take that revenue at cost and that would make revenue look great, but it's not something that, quite honestly, I think is good in the long run.

It would be the wrong sign to our vendors, it would be the wrong sign to our customers, and the wrong sign to our investment community.

And when you look at really your full three segments, where, over the next 12 to 24 months, do you expect the greatest growth or the greatest challenges?

Yes, as we said in the first quarter, problems with Paradise market is definitely a difficult market right now.

There's a lot of end customer competition, and the Lifeboat, the distribution business, is our shining star, and I think it will continue to be there.

Strong growth, and there continues to be strong growth.

A lot of opportunities as well for our vendors.

There's a strong need from vendors to add a little more than just a here's the SKU number and here's the price.

There's tremendous need for technical licensing knowledge on the distribution side.

There's need for training centers, consultants on the distribution side, and quite honestly, we're very excited about the future in that area.

And should we read anything into the decrease of the percentage for VMware?

Not really.

It's, like I said before, our competition is really chasing revenue.

VMware growing as fast as they are, it's the usual suspect to basically buy revenue at all costs, and it's not something that we do.

Okay, then just a last question on the dividend.

You have actually a fairly healthy dividend, a 4% yield.

It's twice what the S&P is.

I'm just wondering, can you comment just a little bit about your intentions there and what the feedback has been from the shareholder base on that?

Well, we have some shareholders who push us on the acquisition and say we should do an acquisition quick.

I actually think we should make the right acquisition and take our time doing so.

If you look at some shareholders have said, "Give us the cash back.

We're smarter than you in investing that," and that's absolutely true, but we intend to utilize that cash to make a strategic acquisition and grow in the services.

And not only from a financial point of view.

I want to make that clear.

It's not only from a financial point of view, but there are needs on a distribution business to not only start distributing products, but also services.

And that's what we intend to do in an acquisition like that.

But as I said before, we're taking our time and making sure that it's the right acquisition.

And having that said, we absolutely believe in the future of our business, and we believe in our net income capabilities, and that's why we decided to increase the quarterly dividend.

Okay, great.

Thank you very much.

All right.

You're welcome, Richard.

(Operator Instructions.) Our next question comes from Peter Lix from Smith Barney.

Hey, good morning, Simon.

How are you doing?

Good morning.

How are you doing?

Good.

I guess you find yourselves between a rock and a hard place here in that people have some greater sequential growth in their revenue and yet it's, when you did that, you gave away things that's basically just turning inventory with no margin.

So when you go the other way, people criticize you that way, too.

I mean, it's a hard place to be in.

Yes, although, Peter, year to date our revenue is up 18%, and our net income is up 42%.

I'd like to apologize for a lot, but I quite honestly think that's stellar performance in any industry.

Well, I kind of agree, but the world looks at it perhaps with a different view.

Secondly, you're hiring an investment banker, and you and I have had this discussion many times.

We want to be buying--we're looking for strategic acquisitions.

Now with CDW out of the market and a competitor, significant competitor and so forth, does--we've had this conversation--but perhaps, selling rather than buying ever cross your mind?

Absolutely.

If we would get the multiple that CDW does for their business, I'm selling it today.

Well, it's somewhat of a different business, but I'm sure there are investment bankers might like to the fact that who might be interested in companies like ours.

No, absolutely.

And it's something that we definitely would entertain.

I don't think right now there would be a realistic opportunity out there.

I don't see any, anybody interested other than the large distribution homes, but they got, they would have an issue with Programmer's Paradise being a reseller on that side.

But at the right price, absolutely.

We would definitely look at the opportunity.

And again, I think we'd be, as we are looking for a smaller company that we could acquire, I think we would make a lot of sense for a larger company because there's such a strong need for added services in the software distribution channel.

There is just absolutely a strong need in that.

It's not simply anymore a, "You know, we can sell everything." The Wal-Mart approach seems to, seems to start to not work anymore in the distribution channel, and it's the added value approach that seems to really catch on.

And a lot of vendors are telling us, "That's exactly what we want from you," so we're having a lot of good discussions to add lines to our software offerings.

And finally, with the VMware set to go public and we will see it stripped, talked about this before, are you feeling that perhaps you would, some of their luster will continue to rub off on you guys?

Yes, I think we represent a large portion of VMware business in North America.

We're a strong partner of them.

We intend to grow with VMware and are excited about their future as we are excited about our future with them.

Dan, maybe you want to add to that?

Well, I think we'll continue to be a strong and vital element of VMware's channel strategy.

Again, our value proposition aligns extremely well with the VMware product offerings.

You know, we were their first ever distributor.

We continue to work very closely with them, and having very knowledgeable account representatives who know about the products, who trained about the products, and offer customized quotes and extraordinary customer service just really aligns well with VMware.

One of the things you said is that, one of the things you didn't do is chase big revenue deals with no gain to you?

Right.

And by the way, Peter, we had those deals in the last couple of quarters where we said they were large deals at lower margins, but at very credit-worthy customers.

Right.

Right.

And that is something that we absolutely will do in the future and we have done.

We, however, do not chase deals that carry no gross margin.

Or ultra-low, meaning lower than 1%.

That, just for your reference, that's $100,000 on $10 million.

Just as an example.

And there's absolutely no way anyone can make money doing that.

And I think it would deceive us internally to say, "Oh, we're still doing great," and it would deceive, it would be a completely wrong signal to our vendors in terms of stating we add value, and then we go out and we just buy revenue.

And it would be the wrong signal to our customers, who we say we add value.

This is not something that we can just give away.

Because if you start doing that, it will be now and it will be forever in the future.

Our next question comes from James Devlin from Hanley and Company.

Hey, good morning, guys.

Good morning, Jim.

What was the cash position at the end of the quarter?

The cash was $20.5 million, and as of the end of the year, our accounts receivable were about $4 million below our accounts payable.

Okay.

And then nobody, obviously, you announced you've hired an investment banker to go out and look at perhaps buying other companies.

The market's got the stock jammed out about three points today as we're on the call.

Obviously, the quarter wasn't what, I guess, people had expected.

But before you go out and start looking at buying at other companies, with the stock price where it is right now, net enterprise value minus the $20 million of cash in the company, which right now for a sub-$50 million worth of enterprise value?

Right.

Wouldn't it make more sense to buy back your own stock than it--look, can you buy companies at cheaper valuations than what your own equity is trading at?

We are actually, we discussed it at the Board meeting.

We have the authority to buy back shares, and we will do so if we see that opportunity.

We absolutely intend to do so if need be.

Absolutely.

Do you have to announce a buyback?

Wasn't another one--?

(Inaudible) D&L said about two or three years ago.

We still have the authority from the Board, and we include that in our 10-K as well, that we have the authority to buy back shares.

Yes.

Okay.

And how many could you buy?

Do you have any idea what's left on that buyback program?

It's about, I think 200,000 shares left.

Okay.

And then my second question with relation to VMware.

And again, one thing, Jim, we are not building this business to be a roller coaster.

Like I said before, we are not selling our shares.

There is not a management member here of the team that says, "I want to sell out now." So the share price in the market will do what it does.

We, I think, really have to focus on building this business.

We should execute focus on the operational improvement of this Company, and I can't manage the share price, and the share price does what it does, and there are expectations set in the market, sometimes realistic, sometimes not.

I think it would be the wrong thing to start focusing on a day-to-day basis on our share price.

I really, we're building this business, and we have done so.

We have 15 consecutive quarters of double-digit revenue growth.

This was our first quarter where we did not hit that.

Yet again, our year to date of revenue is up 18%, and our net income grew at 42%.

I think that's a great performance, and we intend to build this Company for the next couple of years.

And again, we're not selling our shares.

We have absolute faith in our Company and in the performance of our stock.

Okay.

And then on the VMware side of things, 36% of revenue, I guess, for the quarter was VMware related?

Yes.

And if you look at gross margin last year, it was 47%.

Same gross margin as last year.

Okay.

So, no, we did about, I think, about $4 million last, but our gross margin was the same.

Okay.

And then the last question, I guess, is during the quarter, I guess the head of marketing at Programmer's Paradise resigned?

Yes.

It was the VP of Sales and Marketing, Jeff Largiader.

Yes.

And has that person been replaced as of yet?

Yes.

Actually, we announced at our press release when we also announced that we were--for the second consecutive year--listed as number 40 on Fortune's Fastest Growing Companies, something that not a lot of companies can say for two consecutive years, being listed on that list.

Richard Bevis is actually with us this morning, and he joined the Company.

Okay.

All right.

All right?

All right, guys.

Great.

Thank you.

Thank you.

Thank you, Jim.

Have a good weekend.

Our next question comes from Steve Emerson, a private investor.

Historically, you have been around 10% VMware accessories made by independent software houses, and those have been at much higher gross margins than VMware.

What has been the trend of those sales, and are they up substantially year over year?

Yes, Steve, and hence the resultant increase in our gross profit percentage on the Lifeboat division side.

That's definitely something that we've taken back in terms of strategy.

There's absolutely a push here in terms of getting more, I would say, medium gross margin business in the mix to make sure that--it's not our objective to keep up in 8% to 9% gross margin percentage points.

That's not our objective.

Our objective is to grow gross margin dollars.

So that percentage can definitely go down if we add more revenue that's profitable and is meaningful for our vendors and our customers.

That's what we're looking at.

Okay, but can you give me a flavor?

With decreases in VMware, is your percent accessories now substantially greater than the 10% in the last few quarters?

Yes, that has grown.

Yes.

But like I said, you say VMware is down.

VMware--the way we look at it is gross margin dollars, and in gross margin dollars, VMware is the same as last year.

So VMware's not down.

In terms of revenue, they went down, but again, that doesn't pay any of our bills.

No, I think we're talking apples and oranges.

Right, right.

No, and that's fair.

Dan, you want to comment on it?

Yes, thanks.

It's just to clarify, as I mentioned earlier, we've been a distributor for VMware since the get-go, and they came in the channel, and then VMware was this explosive trajectory within the industry.

I think we do a good job of understanding where we are placed in their strategic channel initiative, so as a true specialty value-added distributor, we would be doing a disservice to our channel partnership with them if we were to wade into cost-plus-one attrition deals and scoop all them up and pump up our revenue but not be actually going out and really adding the true value that we add, which is really engaging with these consultancy-type companies, the solution providers, the buyers, the systems integrators, all of those types of folks and delivering the value that we deliver.

So as Simon said earlier, do we walk away from those cost-plus-one deals or even less?

Sure we do.

But do we take a tactical look at what makes sense even if the margin is a little devolved?

Sure, we'll look at that, too.

It's not jus a blanket thing.

As always, our mandate as a Company is we are only interested in really creating and sustaining long-term, enduring, mutually profitable relationships with our reseller partners and our vendor partners, and that's how we look at it, day in and day out.

No, no.

The question is, you're an expert software vendor.

Are the accessory sales rising year over year, even though VMware sales have gone down?

That's the question.

Yes, it has.

Yes, Steve, yes.

Okay.

Can you give a proportion?

Because that is profitable growth versus low profitable growth, and that would play to your strength as an expert.

Absolutely.

The percentage went up between 15% and 20%, Steve.

Okay.

Now that's growth or percent of VMware sales?

As a percent--to compare apples and oranges, you know, apples to apples, that is a percentage of VMware sales, so it definitely went up.

Excellent.

And then year over year growth in accessories?

I would say, yes, absolutely, significant.

In the 25% range.

Excellent.

So I would call that a positive story going ahead.

Absolutely, Steve, and like I said, that's our strategy, so we're adding more specialty software lines.

Okay.

Great.

I appreciate that.

And also, can you give us progress on your installer/systems integrator personnel?

I know that was very hard to build up due to the lack of available people.

Yes, and we actually, we hired another two consultants, but it's like I said before.

The real entry into that market, I think, is with an acquisition.

It's a specialty market.

Just as we are specialty software distributors, that's a specialty market, and that's the real entry into that market.

Excellent.

Thank you very much.

You're welcome, Steve.

Our next question comes from Bert Boksen from Eagle Asset Management.

Yes, hey, Simon.

How are you?

Good morning, Bert.

Am I right in thinking that there's a percentage of your business which is more commodity distribution oriented which is being, which is under pressure now, and if that's accurate, how much is still, if you will, at risk at the business?

And when will see at least that Programmer's Paradise and the portion of Lifeboat which might be a little bit challenged, when will we see that stabilize and maybe start to not impact?

I think what's concerning to the stock is not your absolute performance, but the issue that this could be the beginning of a trend where you've had some phenomenal growth, as you have indicated, and that it could be beginning to roll over.

So could you comment on that?

Yes.

We do not give forward-looking information.

I didn't ask you.

I asked you in a general sense.

No, no, no.

I know.

I just wanted to preface that with that cautionary language, because as in the past, we have not given forward-looking information, and we do not intend to do so.

Having that said, there's definitely a portion of the business of Lifeboat that is a commodity business.

And that the businesses, as they grow, go through these growth cycles.

Definitely as strong as VMware.

Everybody's now focused on VMware.

People are looking after the growth, and as I said before, some of our competitors have not had stellar performance in terms of net income growth, and they're looking therefore for revenue growth.

It's got to be a story for investors.

We decided to not do that this quarter.

I don't expect them to change that strategy any time soon.

In terms of Programmer's, we're really trying to address the weakness in that market with investments in marketing and investments in experienced sales representatives who can turn that trend around.

But the trend has been going on for a couple of quarters, so I do not foresee that to reverse any time soon.

And that's as honest as I can be.

Yes, and how much of your business, in terms of the mix, I guess the prior question talked about accessories, which is growing very, very nicely.

But how much left of your business between Programmer's and Lifeboat is still kind of--as a percentage, maybe, and I'm not asking for an exact figure--but still could be under continued pressure?

Because it seems like this market's not going to get better any time quickly.

Well, I think there's a lot of opportunities in software lines that carry lower margins than what we currently have in distribution but are not as ultra-low as 1%.

I think there is a lot of opportunity in the 4%, 5%, to 6% range.

And I think that's what, that's really what we're going to go after, because there's significant added value to do these lines, and we can add significant revenue as well to our portfolio there.

So that's really a huge market there.

And if you look at us, specialty distributor, at margins of 9% and then the generic distributors at anywhere from 3% to 4% to 5% , I think there's a tremendous opportunity for us to do go out and grab some of that medium-sized, medium-margin business.

But again, we have to make sure that is specialty and something we can roll up into our offering.

So there's tremendous opportunity there, we feel that, on the Lifeboat

Okay.

Thanks.

You're welcome.

(Operator Instructions.) I'm showing no further questions at this time and would like to hand the conference back over to the panel for any closing remarks.

Thank you, everyone, for dialing in and supporting us.

We look forward to reporting our third quarter earnings at the end of October.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes our program for today.

You may all disconnect, and have a wonderful day.