Climb Global Solutions Inc (CLMB) 2008 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 be given at that time.

(Operator Instructions).

As a reminder, ladies and gentlemen, this conference call 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, Syed.

Good morning, everyone.

Welcome to Wayside Technology's fourth-quarter 2008 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 first quarter -- for the fourth quarter at approximately 5 PM Eastern time Thursday, January 29, 2009.

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, January 30, 2009.

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

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

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

Thank you, Natalie, and Good morning to everybody.

Our 2008 fourth quarter was a great quarter, considering the difficult economic environment and the fact that, as previously announced, our Lifeboat unit ceased distributing VMware products as of October 1, 2008.

Although total net sales declined due to this VMware change, we were able to increase our quarterly gross profit by 4% to $4.5 million, up from $4.3 million a year ago.

As we kept SG&A in line, this resulted in a 10% growth in quarterly income from operations.

Cash and cash equivalents amount to $18.7 million, representing 78% of our equity and approximately 56% of our market cap as per close of market January 28, 2009.

We have no debt.

We declared a quarterly dividend of $0.15 a share, a sign of our strong financials.

We continue to have one of the most conservative balance sheets as a public company and do not have a current need for debt.

A word about financial stability -- we have our bank accounts with JP Morgan Chase and Citi, and our marketable securities are in US government securities and insured CDs only.

As stated before, the fourth quarter of 2008 marked the end of distributing VMware-labeled sales for Lifeboat.

Total 2008 VMware-labeled distribution sales amounted to $29.2 million or 17% of our 2008 revenue.

Product gross margin amounted to $1 million, or 6% of our 2008 gross margin.

This compares with 2007, when our total VMware-labeled distribution sales amounted to $57.2 million or 32% of our 2007 revenue.

Product gross margin amounted to $2.5 million or 15% of our 2007 gross margin.

We continue to manage the impact of the VMware change.

We have successfully signed new distribution contracts in 2008 and continue to seek new partners in 2009.

Due to the current uncertain economic environment -- and I want to be very clear about this -- currently we cannot estimate the impact on our future sales and gross margins.

Having said that, 2008 VMware sales for our Programmer's Paradise sales have increased significantly.

We thank VMware for their continued partnership with us.

Other lines also showed significant growth in 2008.

While VMware-labeled distribution sales declined by $28 million, our remaining sales, including the sales for new software publishers, increased by $22 million.

I want to close talking about our quarter noting that Programmer's Paradise has been doing very well attracting new customers and delivering superior sales and marketing services for our software publishers.

A 38% increase in quarterly sales is strong evidence that our approach is working well.

A few more words about the current economic and competitive environment -- many of our distribution competitors have adopted ultra-low pricing strategies for any and all lines that they carry in order to grab revenue without really adding value to the distribution of software.

In order to make up for these ultra-low or zero margins, they continue to increase freight charges, marketing, support, and all kinds of other charges to their customers as well as vendors.

While we firmly believe this will not work for them as a long-term strategy, their actions could hurt our profitability in the short term.

We continue to monitor this development closely, and it's important to mention that we not only manage our operations closely in terms of revenue and gross margins but also in terms of measuring the superior service we provide to software publishers and to our customers.

We believe that the best way to counter these competitive threats is to continue to invest in adding new lines and providing excellent service to our publisher partners.

We have the tools in place to have more publishers, including a great team and great IT infrastructure.

We firmly believe that this is the right time to reach out to and recruit new software publishers.

Many software publishers are looking for a distributor and a reseller that can truly act as an extension of their internal sales and marketing organization.

That is exactly who we are.

Although we cannot influence the larger economic forces that are currently at work, we do look forward towards 2009 with great confidence in our team.

Kevin Scull will now report in the financial numbers.

Kevin?

Thank you, Simon, and good morning, everyone.

I will discuss our fourth-quarter financial results on a company-wide basis, as well as per division.

Net sales were $40 million compared to $47 million last year.

Sales for our Programmer segment were $17.3 million, compared to $12.6 million, a 38% increase.

The growth in revenue is due to our aggressive pricing, flexible payment options, and our customer service-centric sales approach.

Sales for our Lifeboat division were $22.7 million compared to $34.5 million, a 34% decrease.

As previously stated, this was mainly due to our VMware-labeled sales as we ceased distributing VMware labeled sales as of October 1, 2008.

Excluding VMware, Lifeboat sales increased by $2.3 million or 11% compared to the prior year.

Gross profit for the quarter was $4.5 million, compared to $4.3 million.

Gross profit margin was 11.2% compared to 9.2%.

The increase in gross profit margin is mainly due to not distributing, in our Lifeboat segment, lower-margin VMware sales as well as a shift in the revenue mix from our segment.

The Programmer segment with typically higher margins represented 43% of consolidated revenue, compared with 27% in the prior year.

Gross profit for our Programmer segment was $2 million, compared to $1.5 million.

Gross profit for our Lifeboat segment was $2.5 million, compared to $2.8 million.

Gross profit margin for our Programmer segment was 11.8%, compared to 11.7%.

Gross profit margin for our Lifeboat segment was 10.9% compared to 8.2%.

Total selling, general and administrative expense remained flat at $3.1 million.

Now, moving onto the balance sheet, compared to our year-end balance sheet, the following accounts had significant fluctuation.

Cash and marketable securities decreased by $5.2 million to $18.8 million.

Cash was used to fund stock buybacks totaling $1.4 million, as well as dividend payments of $2.8 million, as well as corporate tax payments of $1.3 million as we have utilized all of our net operating loss carry-backs.

I would also like to point out that $7.9 million of long-term receivables are included in other assets.

As we increased our sales with flexible payment options, typically three-year deals with highly rated end customers, other assets increased.

For the fourth quarter, this meant an increase of $4.1 million compared to our prior quarter, and an increase of $4.5 million compared to the end of the 2007.

We demand healthy interest percentage for these long-term receivables, and we perform extensive credit checks.

We manage the portion of our cash [to] value available for this program on a monthly basis.

As current interest percentages for deposit or investments are extremely low, we deem this a good use of our cash.

Accounts Receivable decreased by $7.9 million, and Accounts Payable decreased by $8.7 million from the prior year, due to decrease in sales volume this year.

These accounts closely correspond to our sales patterns.

Working capital at the end of the quarter was $14.9 million.

Our current ratio was 1.63.

Our book value per share is $5.14.

Equity now stands at $23.9 million.

Cash and marketable securities make up 78% of equity.

This concludes my remarks.

Simon, back to you.

Thank you, Kevin.

Now, before we start the Q&A session, I want to discuss one more issue.

As of the end of December, cash and cash equivalents amounted to $18.7 million.

Again, cash and cash equivalents represent 56% of our stock price per the close of business January 28, 2009.

The current dividend yield is approximately 8.4%.

Our company's balance sheet is exceptionally strong with the ability to pursue acquisitions.

The current economic environment could provide a good pipeline of acquisition opportunities.

We support our stock, and despite the current market conditions, we are excited about our long-term future.

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

Thank you.

(Operator Instructions) Jim Stone, PSK Advisors.

Good morning, gentlemen.

One heck of a nice job, that's for sure.

Thank you.

I appreciate that.

Could you give us a little more flavor on what actually happened in the gross margins?

Yes, I mean as we discussed probably starting four or five quarters ago, the VMware business, the distribution part of the VMware business I must say -- because again, as we stated, the VMware business for our Programmer's Paradise and TechXtend side has increased significantly, but the VMware sales on the Lifeboat distribution side, what happened is that a lot of mainstream and specialty distributors came in and their primary strategy was zero or low-margin business.

That's exactly what started to dissolve the VMware business for us.

Basically when we said goodbye to VMware and decided we were going to focus on Programmer's Paradise and TechXtend, what you saw was an increase in gross margin in Q4.

I do want to mention that, again, as we said as well, we are worried about the current economic and competitive environment.

The current environment is apparently influencing our competition in such a way that they now are starting to adopt this strategy for any and all lines that they carry.

So we do expect some impact on our overall gross margin as a result of that.

In terms of our modeling then, would you say that we should expect gross margins to decline from here, hold roughly the same?

What sort of feeling can you give us?

Again, in terms of future guidance, we cannot provide that because it all depends on the last month for us and in that last month, the last two months, and I don't have a current insight as to where our business will be.

Okay.

Then in terms of the cash, I mean, you have been doing some stock buybacks and we haven't seen as strong a decline in the amount of cash.

Could you give us some more flavor of what's happening in there?

I'm sorry, in terms of the cash?

Yes.

Well, mostly, as Kevin alluded to in his remarks, what happened is that we used that and you monitored on that on a monthly basis.

Basically, we used part of our cash to provide to two highly rated and customers flexible payment options.

We deemed that a good investment on our cash considering the current low-interest environment.

Okay, but that -- I don't have the balance sheet in front of me.

Where is that recorded in the balance sheet?

It's in Other Assets.

$7.9 million is in other assets.

Most of that -- in fact all of it, except $60,000, is long-term receivables.

Okay.

So that's the long-term portion of those deals.

I got you.

Okay?

Very good.

Great.

[Madhu] Kadhali, [Fromont] Capital.

Hi Simon.

There seems to be a nice jump in the Programmer's Paradise division in terms of revenue.

I was wondering if you could elaborate a little bit and give us a little more color on what parts of the segment did you see uptick.

Sure.

I mean, I think what we've done last year with the addition of Shawn Giordano, the new Vice President of Sales, Shawn has really focused in terms of the metrics a lot, getting our sales team focused on the pipeline, closing more deals in terms of the open quotes, considering who we should work with and who we should not work with, for what customers we're only providing quotes and not getting business.

So that has basically allowed us to increase the efficiency and effectiveness of the sales reps on the Programmer's Paradise and TechXtend side.

In addition to that, we are able, since we have such a large cash position, to be flexible in terms of payment back to us.

We provide that as an additional offering to our customers in close conjunction with our software publishers.

What about the VMware?

I think you had -- it looks like obviously you don't have the wholesale business, but you are still selling VMware to the Programmer's Paradise?

Absolutely, yes.

That business in fact increased significantly, not only through Programmer's Paradise but in the Programmer's Paradise segment, TechXtend sales are also included.

For those, we have the consultants who not only provide you with software, also hardware and consultancy.

That has increased significantly.

Okay.

In the $7.9 million other assets, which is largely AR financing, could you tell us what kind of customers and what kind of products you are financing please?

Yes.

I'd say these are not typically development tools that we are providing financing for.

These are the large, enterprise-wide applications such as VMware, Quest, Computer Associates kinds of products.

Those are typical deals that lend themselves very well for this kind of program.

Looking at the type of customers, the current environment is such that we definitely do not want to become a bank, so we want to be very careful in terms of managing our risk.

Having said that, there is always risk that these people will not pay, and we therefore monitor this very closely on a monthly basis in terms of the amount of cash that we use for each program.

I want to stress that, again, they are only highly-rated customers.

How many customers do you think have you financed within the $7 million-plus?

What is a typical deal size or who is the largest customer?

I cannot disclose competitive information because I'm sure our competitors would love to have the name of our largest customer when it comes to these programs, but I can tell you that the average deal was about $200,000 to $300,000.

Peter Lux, Smith Barney.

Nice quarter.

I guess the real future is adding new publishers.

One publisher -- and I'm sure, over the last, you've had some announcements about that -- one publisher that seems kind of exciting.

Perhaps you can sort of explain your relationship and where you think they could go -- is it seems to be SolarWinds.

Sure.

[Ted], do you want to allude on that?

Yes, we are very excited about that, Peter.

I was just out in Texas last week visiting the SolarWinds folks in Austin.

You know, this is really stellar network management software; I'm really impressed with the company.

Anybody out there who is looking for a lower-cost alternative to HP OpenView, I mean SolarWinds is right there.

So we are really excited.

We are engaged with them on all levels of our business.

We are going out strong with them and we look forward to a great, enduring, hugely profitable partnership together.

That sounds good.

[Lou], one other question.

We spoke about how adding more consultants sort of ratchets up the gross margins.

You sort of alluded that you've added consultants.

Is this still an emphasis that you are trying to do?

No, I just want to make sure that there's no misunderstanding.

We did not add consultants.

What did happen is that these consultants are more jobs, so they definitely became more profitable for us in '08.

The main fact that I think Programmer's Paradise and TechXtend were so successful is the fact that they, A, really adhere to the metrics -- do your job every single day; also the fact that we are still doing good as a company reflected in the enthusiasm with which these sales reps pick up the phone -- because, again, we didn't miss our budget.

In fact, with 38%, everybody was very pleased within the Programmer's Paradise and TechXtend group.

I think that reflects in sales calls -- so just the proper follow-up and really in terms of closing these deals, going over the quotes, or looking in salesforce.com and reviewing what calls have to be made and adhering to that.

You know, I know you, as you said, you can't predict the future, but you also said you are pretty optimistic on your business.

In putting on your forecasting hat a little bit, when might you think the IT environment might see some upticks?

Oh, I have no idea.

If I look at the large experts -- and by the way, many people say that these were the experts that got us into this trouble in the first place -- not even them though.

I think anybody who could tell you when exactly it's going to turn around, I would tend not to believe that person.

I just want to make sure again that we are worried in the distribution segment of our business that our large competitors have now adopted this zero and ultra-low-margin policy for any and all lines that they carry.

How long do you think they can play this charade?

It depends on how many debts they have on their balance sheet and how eager their investors are.

But if you look at the public companies in our sector, you'll see that we've declined about 10% in our share price from January 1 to the end of December.

The majority of our competitors have fared far worse than we have.

The question is how much acquisitions that they rolled into their company, and how did they finance those acquisitions?

That I think is dependent on them.

But I think we could see some -- there might be some dramatic shifts in strategy soon, depending on how good or how not good this is working for them.

Once again, good job, and we will see down the road.

Thank you, Peter.

Have a good weekend.

[Aaron Lehman], Private Investor.

Good morning and congratulations on a difficult quarter.

I think that it speaks well of what you've done so far.

The comment you made is that you -- the possibility of acquisitions with utilizing your cash for share buybacks, dividends and possible acquisitions.

Let's take the flip side of that.

With $18 million-plus in cash and revenues in the $160 million level, you have become a very, very attractive target.

Institutions own about 28% of your company, insiders and other 25%, approximately.

There's very little stock out there.

Hypothetically speaking, a buyer at $10 gets $3 and change in cash back, and it cost them about $6 a share or roughly $25 million, $26 million to buy a company with $160 million in revenues.

Then he has another critical mass beyond what he already has.

Have you been approached, or would you consider a third-party coming in at an overture at a higher price than current market?

We are a public company, so first and foremost, strategy is to give excellent rewards to our shareholders.

It's a small industry; people talk a lot.

I talk to a lot of other companies.

There's been no formal request in order to come in and look at our company.

We are very excited about our own company, so I would definitely, in terms of the board and in terms of the investors, that definitely has to come under significant premium over the current market price.

I would be willing to look into it because we do have faith in the future of our company.

But having that said, we are a public company and we will do what's best for our shareholders.

Right, right.

No, I appreciate that.

I think, so far, since you've taken over the helm a couple of years ago, you've done a terrific job.

Thank you for that comment; I appreciate that.

Have a good weekend, Aaron.

Madhu Kadhali.

(inaudible) a couple more questions.

On that financing you guys are doing, what kind of terms do you extend to the customers?

Secondly, if you guys can give us some cash flow numbers, what is the cash flow from operations this quarter?

Thank you.

Sure.

In terms of the terms for a customer, it varies greatly in terms of the budget allocation of these customers.

So it could be a flat "You pay me in 30 days, you pay me in a year, and you pay me in year two." It could also be "Pay me in 60 days and then pay me the rest in six months." It really depends on the budget allocations of these large companies in terms of how long this -- the average term is.

Having that said, in the 10-K, we will have a footnote to that and there will be definitely disclosures in terms of that.

Our accountants are working on that with our finance staff.

Do you get any kind of return or do you charge them interest for that?

(multiple speakers)

Oh, absolutely, yes.

We charge them very healthy interest rates.

Again, those interest rates depend, and I do not want to disclose them because our competition, I'm sure, would be very interested in that, but they are very healthy interest margins.

Right now, we can demand those healthy interest margins because of the credit crunch.

Right.

So the other thing -- cash flow from operations for the quarter, please?

Yes.

If you look at the cash flow for the quarter, I think it was slightly below -- do we have the year, Kevin?

(multiple speakers) for the year.

We have it for the year?

Yes, for the year, if you look at it for the year, it's about $0.5 million used for operating activities.

The main reason for that is the timing of our Accounts Payable and Accounts Receivable amounts.

Jim Stone, PSK Advisors.

Yes, seeing as we are almost a third through the current quarter, could you give us some sort of feel?

Are you seeing normal seasonality or just what's happening at the moment?

A, it's very, very early to see how the current quarter is going.

Having that said, January is extremely light.

Okay, so you're saying it's about what you're seeing as normal seasonality then?

Yes.

You know, in terms of seasonality, again, we don't see too much of that seasonality.

It's more in terms of adding publishers and seeing net sales, but January sales so far have been light.

What sort of linearity did you have in the December quarter?

Was it --?

Oh, our quarters are extremely dependent on the last month, and in the last month, extremely dependent on the last two weeks, as the rest of the software and hardware industry.

Okay.

That didn't change this year from what you've seen?

No.

Would you say the quarter was more price-sensitive than usual, the same as?

What can you tell us about the pricing pressure in those last two weeks?

It's tough to say for the fourth quarter.

Again, with the VMware sales gone for us, the overall margin has increased significantly for the Lifeboat distribution part of our business.

Programmer's Paradise -- I mean we operate in very competitive environments with large competitors and I don't think that has changed.

It is a very competitive business.

If you look at our margins again, that's a pure number [game].

You've really got to work at it hard to end up with income from operations over 2%.

But we manage that very closely.

Okay.

Again, keep up your philosophy of changing to the higher margin has definitely paid off.

Well, thank you.

Have a good weekend.

I'm showing no further questions at this time.

I would now like to hand the conference back over to you for any closing remarks.

Okay.

I would like to thank everybody for their time this morning.

We look forward to reporting our first quarter in April of '09.

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.