Climb Global Solutions Inc (CLMB) 2007 Q3 法說會逐字稿

Welcome to the Wayside Technology third quarter 2007 results conference call.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms.

[Natalie Turner].

Thank you and good morning.

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

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

We released earnings for the third quarter at approximately 5 PM Eastern Time yesterday, October 25, 2007.

The earnings release is available at the Company's investor relations Web site, at waysidetechnology.com.

Today's call, including all questions and answers, is being Webcast live and can be accessed via the Web site 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, October 26, 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, Inc.

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 good morning to everybody.

This quarter we continued to implement our plan to deemphasize the lowest-margin segments of the VMware business while new VMware distributors adopted ultra-low pricing strategies.

As a result, our VMware labeled sales declined 9.4 million in the third quarter.

Excluding VMware, sales of our higher-margin lines increased by 2.5 million, or 10%.

For the quarter our net income was 822,000, as compared to 859,000 last year.

Year-to-date, our net income was 541,000, 24% above last year.

Our Programmer's Paradise segment represents about 26% of our sales.

In this segment, sales decreased by 6.2 million, mainly due to declining VMware sales as well as increased competition in the direct to end user segment of our business.

We had some large onetime deals last year that did not occur this year, so it was a tough comparison sales-wise.

The decline in VMware sales is mainly due to a change in government GSA program by VMware.

VMware has selected an exclusive reseller/distributor for GSA government sales.

Programmer's Paradise now receives a referral fee for VMware GSA sales.

This has a positive impact on gross margins; however, as a result, VMware sales for our Programmer's Paradise segment decreased 3.1 million.

Gross margin as a percentage increased from 12.2% to 12.9% this quarter.

The programmer segment is also up 6% sequentially compared to the second quarter of this year.

As stated in previous calls, we deemphasize the lowest-margin segments of our portfolio.

As a result, sales in the Lifeboat distribution segment were down slightly.

Our remaining distribution lines showed strong growth.

Excluding VMware, sales increased by 6 million, or 41%.

Despite a 2% decline in sales, gross margins for Lifeboat increased 19%.

Gross margin as a percentage increased from 7.3% to 8.8%.

We recently received certification for our distribution business to act as a VMware Authorized Consulting Partner, or VAC.

Our customers can now tap into our virtualization technical resources to augment their virtual offerings.

We also just launched a brand-new incentive program, Lifeboat*Points, designed to leverage Lifeboat's technical, consulting and other services.

Our reseller customer base can now earn points for their Lifeboat purchases of VMware related Virtualization World View software from software companies that currently include Acronis, DataCore, PHD Technologies, Platespin, StorageCraft, SyAM, Thinstall, ToutVirtual, Virtugo, and Vizioncore, and redeem these points to grow their virtualization business.

As a distributor, we are now offering a full-service offering to our software vendors.

A vendor can simply have us handle their complete [indirect] channel, including marketing, rebate programs, training, certification of resellers, etcetera.

Software vendors have indicated a clear interest in these new programs.

This is where we can add value and see the future of our distribution business.

A word about VMware.

VMware remains our single-largest vendor and represents 30% of our third-quarter revenue.

We continue to be a strong partner for VMware, and we continue to focus on virtualization.

We also expect to grow our sales by adding new software lines and penetrating new accounts.

Kevin Scull will now report on the financial numbers.

Thank you, Simon, and good morning, everyone.

I will discuss our third-quarter financial highlights.

Net sales were 41.8 million compared to 48.7 million last year.

Canadian sales were 5.1 million for the quarter, or 12% of total sales.

Gross profit was 4.1 million compared to 4.4 million last year.

Gross profit as a percentage of net sales was 9.9% compared to 9% last year.

Total selling, general and administrative, SG&A, expenses, were 3 million, down slightly compared to 3.1 million last year.

Our net income in the third quarter of 2007 amounted to 822,000, or 2% of net sales, compared to 859,000 last year, or 1.8% of net sales.

Our primary earnings per share were basically flat at $0.19 in the third quarter of 2007, compared to $0.20 last year.

On a fully diluted basis, our earnings per share were $0.18 compared with $0.19 last year.

Now moving onto the balance sheet.

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

Accounts receivable decreased by 7.9 million and accounts payable decreased by 13.6 million from year end since the fourth quarter is usually our strongest, and these accounts correspond to our sales pattern.

Working capital at the end of the third quarter was 20.2 million compared to 16.5 million at year end.

Our current ratio at September 30th is 1.93, compared to 1.46 at year-end.

Our (inaudible) also improved significantly from year-end as well.

It is 1.87 at September 30th compared to 1.42.

Equity now stands at 24 million, a $2.8 million increase.

Our book value per share is $5.43.

With our strong balance sheet with over 20 million of working capital and no debt, we are well positioned to fund not only our existing operations, but any opportunities to expand our business.

This concludes my remarks.

Simon, back to you.

Thank you, Kevin.

Before we start the Q&A session, let me share with you the following points.

(1) We are a key player in the virtualization space, now and in the future.

We expect VMware, as well as products complementary to VMware, to be a major driver of growth and profitability in the future.

(2) Historically, Q4 is one of our stronger quarters in the year.

And although it's still early in this fourth quarter, we do expect Q4 to be one of our stronger quarters again this year.

(3) I'm a runner, and let me tell you, we are in a marathon, not a sprint.

To sell at 0% margins, or near zero, is something that no competitor can keep up for a long time.

It just does not make sense.

Having said this, our cost structure allows us to take business at very aggressive margins.

And we will do so, but it has to be profitable.

I would like to close with stating that we are excited about where we can take this business, and we continue to work hard at it.

With net income up 24% year-to-date, new service offerings, a great team of dedicated employees, better marketing than ever before, we have a great base to build on.

I want to thank all of my coworkers for their hard work, their feedback and their commitment to our company.

Operator, we can now start with the Q&A session.

(OPERATOR INSTRUCTIONS).

Rich Kugele, Needham & Company.

So, just to get our hands around this competitive landscape on the virtualization or VMware side, how much business, if you had to guess, did you walk away from in the quarter?

And specifically, if you look at the total VMware opportunity that's available to you, how much do you think of that overall segment now is what you would consider aggressively priced?

Do you think that that's somewhat contained?

Have we seen the worst it can get?

Or will you think you'll need to continue to deemphasize over the coming quarters?

I think the portion of the business that we see priced very aggressively is contained through a couple of large volume players, and they were our customers.

That's where -- I think it is basically contained to that segment of our sales.

Last year we had a great run with VMware.

We're continuing to have a great run with VMware.

And margins -- at very aggressive margins -- at 3% it's great.

At 2% we still make money.

At 1% it doesn't make sense.

At 0% it definitely does not make sense anymore.

And that's what we saw this quarter.

And the main reason for that is that we faced some large competitors in the distribution business who were looking for revenue.

They announced that, and they also announced in their quarterly conference call this quarter that they were going to be less aggressive on pricing as their stock also got impacted by showing only revenue growth, and not a significant increase in their net income.

So you can only be as smart as your dumbest competitor.

And if you're dumbest competitor is giving it away at zero, there's unfortunately nothing that we can do.

I want to stress, though, that we can never save our way out of this.

We can only invent our way out of this.

At the same time, there's a strong need on the VMware side to really not have this share shift, and to have a distributor do what they really wanted to do, and that is manage and grow their indirect channel.

And the same not only goes for VMware, it goes for all these other partners.

Now, I wish I could add a partner like that on a monthly basis, and we would have a nice run up.

But unfortunately this is not as such.

Sometimes ourselves -- because we're not representative of the complete software market, and we're a relatively small and specialized niche player -- we go up in certain quarters, we go down in other quarters.

Overall the trend is exactly where we think we should go.

If we start to price on volume and we price it at zero, not only do we lose, everyone loses.

Typically, if we play on volume, try to go up to the big guys and go for 0%, we lose.

At 0% we definitely lose.

If we go on value, and that is clearly where all the software vendors are wanting to take it right now, we win.

Because we have a dedicated and flexible team who can handle these kind of calls.

If you ask VMware, they are very excited to work with us.

And one of the reasons that they feel (inaudible) the reason that they did authorize us to become an Authorized Consulting Partner.

Dan Jamieson and I are going out November 6th to visit VMware and talk just about these issues as we talk about it with you.

You hinted that there were some other lines that potentially you could add in this vein.

I guess it's kind of a -- you were in the forefront of this whole virtualization concept.

And I guess now that it's getting a lot more visibility, you're also having to deal with extra competition.

But, can you give us a general sense on what areas you consider ancillary?

Absolutely.

As I mentioned, we actually created a world view of virtualization software.

And what we have done there is if you really want to virtualize your servers, you do not only need VMware; you need companies with additional offerings in security, for instance, data, recapture, etcetera, etcetera.

So you need companies like a Platespin, a StorageCraft, a very strong player; you need an Acronis, a DataCore.

So all these companies are surrounding VMware and see that ecosystem growing quarter-over-quarter.

These companies don't -- same as VMware, they don't want this margin to go away.

But meanwhile, VMware has a tremendous stock prices, tremendous expectations.

So these large -- everybody thinks if I can play on -- some people think if I can just give the product away, hopefully later on I'll make margin on that.

Again, we see it contained to a couple of our larger customers who have a lot of volume, and somebody was picking up that large volume.

They cannot handle all these smaller value players that we handle.

And they're typically at higher margins, and for a good reason, by the way.

It is not that we just take margin; we walk away from lower-margin business.

We are in the lowest margin business that there is.

We are a distributor and a reseller.

We understand that.

We are not a high specialty player with enormous margins in the 30 to 40%.

That is just not reality in our business.

So we have to be aggressive.

We have a lower cost structure than everybody else.

But like I said, it has to be profitable.

0% just does not make sense.

Sounds like you're doing the right things.

Thanks for letting me take the question.

[Peter Lux], Smith Barney.

We've talked about making acquisitions now, considering your strong balance sheet, for a long time.

What kind of progress have you made along the things that would add to your margin in your consulting business?

Like I said in the last conference call, we've hired investment bankers.

They're now in the process to (inaudible).

We're visiting with companies.

Like I said before, especially now, you have to make sure that it's the right acquisition to buy.

That cash will stay in our balance sheet.

That is not going to go away.

If you look at our year-to-date results, we're up 24%.

What's more important than to go out quickly and say, okay, we've got this, is making sure that we find the right player.

And that's what we're currently doing and working hard on with our investment bankers to select and identify and visit these potential targets.

Have you identified many?

Yes, absolutely.

Our investment bankers are doing a great job there.

(OPERATOR INSTRUCTIONS).

Steve Emerson, Emerson Investment.

Last quarter you had indicated that you had lost VMware only for CDW, but you had retained all the ancillary and the rest of your specialty business with them.

Has this spread to some of your other large resellers in Lifeboat?

Yes.

Like I said, it's the large-volume players where people got very aggressive on.

The good news there, as I said, is (A), we now launched Lifeboat*Points; very good results back from these guys.

And two is the value.

A lot of people -- the value-added consulting partner from VMware is something that we think potentially can really help us.

How will that help us?

What does this mean?

Does it mean we're referred for other product?

How will this help us?

That's a good question.

Exactly.

What will happen as a fact is that you as a reseller see an opportunity to grow in VMware, but you're hesitant to send your consultants, because a lot of these resellers are worried about [bench time] out to VMware to get trained.

So you want to make sure it's a real opportunity.

What we now offer is our consultants to go out under your name as a reseller.

So there's a reseller out there; he sees an opportunity to not only sell the software, but to really install it; and a customer might ask I have the need for a consultant who installs this software for me.

So instead of now training these people yourself, you can come to us; we will also supply the consultant to you, who then will go out to the end customer under your name and will install the software and help them with their virtualization offering.

You characterized the business having been zero margin for some of these large players.

Since you mentioned the competing zero margin distributor announced that they were going to raise pricing, have you seen it, and is the competitive pricing for this now up to levels that would be profitable for you?

I don't think you'll see a quick turnaround there.

I do not.

I definitely do not.

That will be a delayed return, I think, back to normal levels.

I do want to stress, though, Steve, that what's important to understand in the third quarter is the large -- couple of large deals that we had in programmer segment -- it's important to note that our Lifeboat distribution segment, despite sales being down 2%, gross margin increased 19%.

It's mostly on the Programmer's Paradise segment, where we have a tough comparison versus last year, where we lost some of that margin.

So it's important to note that this is not at all a disaster for Lifeboat.

In fact (inaudible) growing fast.

19% in gross margins is excellent growth.

So we think with a return back, a delayed return back to value where we all want to be, and every distributor will tell you, that we will see that uptick again next year.

(OPERATOR INSTRUCTIONS).

I'm showing no further questions at this time, sir.

Great.

Thank you.

I want to thank all of our long-term shareholders.

We're excited about the future of our business and we thank you for being on the call.

Should you have any additional questions, please do not contact -- please do not try to -- please -- please do not hesitate to contact us.

Thank you.

Have a great day.

Thank you for participating in today's conference.

This concludes our program for today.

You may all disconnect, and have a wonderful day.