Climb Global Solutions Inc (CLMB) 2009 Q3 法說會逐字稿

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  • Operator

  • 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 the conference at this time.

  • Natalie Turner - IR

  • Thank you, Sahid, and good morning, everyone.

  • Welcome to Wayside Technology's third-quarter 2009 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 Thursday, October 29, 2009.

  • The earnings releases available at the Company's investor relations website at Wayside Technology.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.

  • The conference call and the associated webcast contain time-sensitive information that is accurate only as of today, October 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 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.

  • Simon Nynens - Chairman, CEO

  • Thank you, Natalie and good morning to everybody.

  • We delivered solid results this quarter.

  • We performed well in the continued tough economic climate.

  • We strengthened our position in the software distribution market and continued to sign on new vendors.

  • Excluding VMware, Lifeboat sales increased by $1.9 million or 9%, a strong sign of the market share we were taking in software distribution.

  • In addition, our continuing focus on costs allowed us to drive a solid earnings performance.

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

  • Catherine will discuss the results in detail, but I would like to make the following remarks regarding our subsidiaries.

  • Let's start with Lifeboat.

  • With the continued tough economic climate, many software publishers are looking for distribution alternatives for their products.

  • Mainstream distributors continue to see software as an add-on sale to their hardware lines and continue to treat software lines as such.

  • These distributors typically leave with an ultra-low pricing strategy for software and aim to make their money by charging software publishers all kinds of fees.

  • As a result, gross margin pressure continues to be of concern to us.

  • We offer software publishers a value alternative.

  • We know the products we sell and design our distribution service as such that we make our money while we sell the publishers' products, not by charging them a set of extravagant fees.

  • As a result, the interest of Lifeboat and our software publisher partners are perfectly aligned.

  • We, therefore, believe that this is the time to invest in our future growth by reaching out to and recruiting new software publishers.

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

  • Programmers and TechXtend also performed well considering the continued tough economic climate.

  • Q3 of 2009 lacked the opportunity to close more large software deals.

  • We do expect Q4 to be better.

  • We are dedicated, knowledgeable, and flexible.

  • And I would like to stress that the decline in revenue on the Programmer's Paradise business was partially offset by strong growth of the TechXtend revenue.

  • We continue to invest in TechXtend, selling combined hardware, software, and consultancy services.

  • This will be the last quarter when year-over-year comparison will include VMware.

  • Lifeboat ceased distribution of VMware at the end of the third calendar quarter of 2008.

  • And I commend our entire team for the way we have successfully managed this transition in an unbelievably tough economic climate.

  • We now offer a much more diverse line of software products, and more and more customers, as well as software publishers, realize the value that we deliver to them.

  • We remain focused on adding new publishers and providing our customers with excellent service and providing our employees with a great and rewarding working environment.

  • Kevin Scull will now report on the financial numbers.

  • Kevin?

  • Kevin Scull - VP, Principal Financial Officer, CAO

  • Thank you, Simon, and good morning, everyone.

  • I will discuss our third-quarter financial results on a Company-wide basis as well as per segment.

  • Net sales were $35.3 million compared to $45.4 million last year.

  • Sales for our Programmer's Paradise segment were $11.5 million compared to $15.3 million last year, representing a 25% decrease.

  • This decrease was primarily due to a shift in mix of order size, as we sold more of our smaller, specialized software lines, which typically carry higher margins.

  • Sales for our Lifeboat segment were $23.8 million compared to $30.1 million last year, representing a 21% decrease.

  • The decrease in net sales for our Lifeboat segment was due to a decrease in VMware sales.

  • Lifeboat ceased distributing VMware as of October 1, 2008.

  • Q3, 2008 VMware-labeled sales were $8.2 million compared with new VMware sales in our current quarter.

  • Excluding VMware sales, Lifeboat sales increased by $1.9 million or 9% compared to the prior year.

  • Gross profit was $3.7 million compared to $4.3 million last year.

  • Gross profit as a percentage of sales was 10.5% compared to 9.4% last year.

  • The increase in gross profit margin as a percentage of net sales was primarily caused by the shift in product mix and the fact that we ceased distributing VMware, which typically carried lower margin.

  • Gross profit dollars for our Programmer's Paradise segment was $1.4 million compared to $1.6 million last year, representing a 17% decrease.

  • Gross profit for our Lifeboat segment was $2.3 million compared to $2.6 million last year, representing an 11% decrease.

  • The decrease in gross profit dollars was due to lower sales volume.

  • The gross profit margin as a percentage of sales for our Programmer's Paradise segment was 11.9% compared to 10.7% last year.

  • Gross profit margin as a percentage of sales for our Lifeboat segment was 9.8% compared to 8.7% last year.

  • Total selling, general and administrative, SG&A expenses, were $2.7 million compared to $3 million last year.

  • As a percentage of net sales, SG&A expenses were 7.8% compared to 6.7% last year.

  • The decrease in the SG&A is mainly due to cost control and lower commission expense due to lower sales volume.

  • Direct selling costs for the third quarter of 2009 were $1.3 million compared to $1.4 million last year.

  • Our net income amounted to $598,000 compared to $811,000 last year.

  • As a percentage of sales, our net income was 1.7% compared to 1.8% last year.

  • On a fully diluted basis, our earnings per share were $0.13 per share compared to $0.18 last year.

  • Now, moving on to the balance sheet, compared to our year-end balance sheet, the following counts had significant fluctuations.

  • Cash and marketable securities decreased by $4.7 million to $14.1 million.

  • Some of the large uses of cash during the year were corporate tax payments of $1.6 million and dividend payments of $2.1 million.

  • Accounts receivable increased by $3.4 million from year end due to the timing of payments from some of our larger customers.

  • Accounts payable decreased by $2.3 million on lower sales volume during the quarter.

  • Our book value per share was $5.15 and equity now stands at $24.5 million.

  • And cash and marketable securities make up 58% of our equity.

  • This concludes my remarks.

  • Simon, back to you.

  • Simon Nynens - Chairman, CEO

  • Thank you.

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

  • Operator

  • (Operator Instructions).

  • [Aaron Lehman], [LSP Partners].

  • Aaron Lehman - Analyst

  • Good morning.

  • Congratulations on a reasonably good quarter in view of the environment.

  • Just questioning if you have any specific forecasts as to when you see an upturn in 2010 and the new relationship you have for Lifeboat that you just announced a few days ago?

  • What kind of an impact you think that might have going forward?

  • And also, are you exploring acquisitions?

  • And have you had any share buybacks which you had announced quite a few quarters ago, and what your progress is in that particular area?

  • Thank you.

  • Simon Nynens - Chairman, CEO

  • Thank you.

  • In terms of the forecast, we don't give forward-looking information.

  • We don't include that.

  • Even in terms of Q4, we looked at October, but it's really early to tell what the Q4 results will be.

  • Looking forward though, when this economic tide turns, I can tell you with the new vendors that we have signed on, we see very strong growth opportunities coming towards us.

  • And in addition to that, more and more software publishers are realizing the value that we offer them specifically in distribution.

  • So we actually expect even more software distributors -- software publishers coming towards us.

  • So we look forward with great confidence in 2010.

  • Aaron Lehman - Analyst

  • Thank you.

  • Simon Nynens - Chairman, CEO

  • And then in terms of acquisitions, we continue to look at that.

  • As I said previous calls, I'm very cautious; I don't want to catch a falling knife.

  • What we are looking forward to is investing in our own sales team.

  • We have invested in outside sales reps.

  • We continue to invest in TechXtend.

  • We're also exploring the opportunity of growing Lifeboat even in an international sense.

  • And we do so cautious and make sure that we're not spending millions on a maybe opportunity.

  • I want to really focus on what we do well and build on that.

  • Aaron Lehman - Analyst

  • Good.

  • And share buybacks?

  • Simon Nynens - Chairman, CEO

  • We continue to look into that.

  • We changed investment -- not investment bankers, but the holding company that holds our shares this quarter, so we look forward to doing more of those in Q4.

  • Aaron Lehman - Analyst

  • Okay, excellent.

  • And on the flip side, have there been any overtures as to those people who could be interested in acquiring [Wayside]?

  • Simon Nynens - Chairman, CEO

  • No.

  • We continue to talk.

  • It's a small industry; we continue to talk.

  • But I firmly believe that the value we represent is best represented when we are a stand-alone company.

  • I really believe that.

  • You can only focus on so much, and we focus on software.

  • And more and more people realize that value.

  • So of course there are people very interested in us, but I firmly believe that we are perfectly set up.

  • We have no debt.

  • We can go at this alone perfectly.

  • We don't need a larger partner.

  • Aaron Lehman - Analyst

  • And what about Windows 7?

  • How much of an impact do you expect this could have on you?

  • Simon Nynens - Chairman, CEO

  • I think that -- we talked about this at the Board meeting this week as well.

  • And I think the impact of 7 on our Company, of course it's good if people upgrade their computers, but I do think that the -- it won't be everybody will now upgrade to OS 7 in Q4.

  • It will be a slow process because people really need to invest a lot of money in hardware.

  • And then what we see as a result of that once you do buy new hardware and you do install a new operating system, you would have to then reinstall your applications, at which point many people will say okay, we need either new software or need to upgrade that software if we reinstall it.

  • So that we do see as positive for next year.

  • Aaron Lehman - Analyst

  • Okay.

  • Thank you very much.

  • Operator

  • George Melas, MKH Management.

  • George Melas - Analyst

  • Good morning; good morning, Simon.

  • Question on the Lifeboat margin except for VMware, I think if we exclude VMware, the gross profit was roughly flattish on a slightly lower revenue.

  • So that suggests some pricing pressure.

  • And is that what you -- I think you alluded to that in your remarks.

  • Simon Nynens - Chairman, CEO

  • Yes, correct.

  • George Melas - Analyst

  • Okay, great.

  • And then I think on the Accounts Receivable, they came down a little bit; and does that relate to your remark that there were no large deals at Programmer's Paradise?

  • Simon Nynens - Chairman, CEO

  • Yes, on a sequential basis, they did.

  • But they actually compared to end of the year they went up significantly.

  • And the reason for that is A, the timing of this, September was a lot stronger than August.

  • If you look at it, July, July was okay.

  • August was very weak, I would say, and September was stronger.

  • And as a result of that, there were more -- the sales more of the sales were booked in the latter part of September.

  • Not the last week and again, we didn't have the opportunity to bid on a lot of large software deals.

  • But more of the business was done in the last two weeks of the quarter so that you see that reflected in the statement in terms of Accounts Receivable.

  • George Melas - Analyst

  • Okay, great.

  • And could you just give us a very broad view of some of the new publishers that you are signing up or that you are trying to sign up?

  • And in what space they play in, and were you excited about them?

  • Simon Nynens - Chairman, CEO

  • Sure.

  • Dan Jamieson, our General Manager of Lifeboat, would like to answer that question.

  • Dan?

  • Dan Jamieson - VP, General Manager

  • Thanks, Simon.

  • Yes, I think some of the recent agreements that were signed were really expanding, as Simon alluded to, internationally with -- our SolarWinds is a great partner of ours.

  • And they are in the network management space.

  • What they do is they represent a lower-priced alternative to a product like say an HP OpenView.

  • For the price of a maintenance on an HP OpenView, you can install and deploy SolarWinds solutions.

  • So that's a partnership that's been really growing immensely for us.

  • Another partnership for us and we've just signed exclusive with them is a company formerly known as Acresso; it's now called Flexera.

  • But most people in the industry know them by InstallShield.

  • And it's a pretty legendary install program.

  • They've also got some admin studio products, other great products.

  • So they recently moved away from a broad-line distributor to come to Lifeboat for the reason that Simon alluded to earlier, because of our special focus and ability to customize our partnerships with our vendor partners and our reseller partners.

  • So that one is growing real rapidly as well.

  • We have other agreements with companies like Veeam Software.

  • We just completed a full year with Veeam, and that's in the virtualization space.

  • Simon mentioned VMware earlier, and we continue to focus, even though we don't distribute VMware any longer, but we've continued a strong focus on that space and continue to be dedicated to it and Veeam is emblematic of that, along with other great partners in that space as well.

  • Simon Nynens - Chairman, CEO

  • So again I just want to stress that that's a good point, Dan.

  • We carry more distribution lines in terms of virtualization than any other distributor.

  • We are very focused on that.

  • We've got consultants.

  • We have training centers on the West Coast and on the East Coast in terms of virtualization, and we continue to see that as a key element for us.

  • Dan Jamieson - VP, General Manager

  • Just to add to Simon's remarks on that, and the reason for that is we've always been successful there because those types of products align so well with our value proposition.

  • And that is that our reps are knowledgeable about the products that we distribute.

  • We really work hard and endeavor to become a true extension of the vendors that we represent out into the channel.

  • George Melas - Analyst

  • Great.

  • Okay.

  • That's very helpful.

  • And then maybe real quick question, Simon.

  • Can you elaborate a little bit about an answer to the previous question, which is about how you are looking to allocate your resources for growth?

  • I don't know how much more you can say, but just --

  • Simon Nynens - Chairman, CEO

  • No, that's a good point.

  • Again, I'll look at acquisitions, but there are many companies that are right now either declining very fast or even losing money.

  • And the spin there is if we would buy them, then somehow magically we could turn that around.

  • I've seen that many times before, failing.

  • So I'm very cautious when it comes to that.

  • What I am very excited about is growing in small steps.

  • And I think right now, the opportunity in terms of the economy is that there's a lot of talent out there with a lot of great relationships that are looking currently for jobs.

  • So what we're looking at very specifically is adding great sales talent to our Company.

  • And in addition to that, we are really eyeing the international expansion in terms of, does it make sense for us to explore international presence again?

  • And specifically in Europe?

  • George Melas - Analyst

  • Great.

  • Okay.

  • Thank you so much.

  • Simon Nynens - Chairman, CEO

  • Thank you.

  • Have a good weekend.

  • Operator

  • Jim Devlin, Henley & Company.

  • Jim Devlin - Analyst

  • Good morning, guys.

  • I jumped on the call a little bit late, but I've been through the numbers.

  • I just wanted to find out, the Q3 is over and I'm thinking the VMware issue for the last 12 months should be behind us.

  • So in the fourth quarter, we should start seeing apples-to-apples comps?

  • Simon Nynens - Chairman, CEO

  • Yes, correct; yes.

  • Jim Devlin - Analyst

  • Okay.

  • So we should start seeing, theoretically, if the numbers hold up the way they are, we could start showing Wall Street that the Company has the ability to grow the top and bottom line again?

  • Simon Nynens - Chairman, CEO

  • That's definitely our objective, absolutely.

  • Jim Devlin - Analyst

  • It's been difficult in the headwind of walking away from the low-margin VMware stuff, but just so we're on the same page.

  • Simon Nynens - Chairman, CEO

  • (multiple speakers).

  • Jim Devlin - Analyst

  • So this quarter moving forward, we will get a better picture of what Wayside really is ex VMware?

  • Simon Nynens - Chairman, CEO

  • Absolutely.

  • And like I said in my remarks as well, I really commend our entire team for the way that we have successfully managed this.

  • This was a large transition in an unbelievably tough economic climate.

  • A lot of companies are reporting our kinds of numbers without the loss of a major vendor.

  • We've transitioned; and in fact it's been a very good transition for us in terms of adding new software publishers.

  • And as I said to the previous question as well, we now offer a lot more diverse line of software publishers.

  • We've added a lot of new software publishers.

  • And if the economic tide turns around, I think we're perfectly aligned with the interest of them in terms of really benefiting from the improved economic climate out there.

  • Jim Devlin - Analyst

  • Okay.

  • And then I had like two small ones and then one big one.

  • The small one, can you give us any kind of look?

  • October is pretty much over.

  • Can you give us a feel for what the trends look like in October?

  • Simon Nynens - Chairman, CEO

  • It's hard to say because the months over the year -- October was an okay month; I would say October was okay.

  • There's a lot in the pipeline.

  • The question is, is it going to close in Q4 or Q1?

  • So it's very early to say.

  • And again, as I stressed before in the previous conference calls, our business is really dependent on that third month, and specifically the last two weeks of that quarter.

  • So (multiple speakers)

  • Jim Devlin - Analyst

  • So seasonally and historically, the fourth quarter has been the biggest quarter for this Company on an earnings basis?

  • Simon Nynens - Chairman, CEO

  • Yes; if you look at it typically, our first quarter is the slowest quarter.

  • Then the third quarter is the second slowest.

  • And then the second quarter is stronger.

  • Then the fourth quarter is typically the strongest quarter.

  • Jim Devlin - Analyst

  • Okay.

  • And then, as far as the health-care reform, if it ever happens or it does materialize, I mean there's gobs, God knows how much money.

  • But a lot of it hinges around the electronic health record.

  • Simon Nynens - Chairman, CEO

  • Yes.

  • Jim Devlin - Analyst

  • Can you speak to -- would you guys be -- would you see an up-draft in your business?

  • Would you guys be a player on any of the governmental or private or public sector having to throw money at complying with -- like an electronic health record or maintaining the standards of -- be it with the new administration in mind?

  • Simon Nynens - Chairman, CEO

  • I think the same I could say about the OS 7; think it will be secondary.

  • People lead with that and then that in fact actually causes them to upgrade the remaining software lines, and that's where we actually come in.

  • So I do think there's a positive effect from that, but I think it's secondary.

  • It's almost like Windows OS 7.

  • It's not that we would benefit -- we do not produce any software.

  • Like Siemens has all consultancy line on that.

  • But there's a secondary effect of that.

  • Shawn, maybe you want to add to that?

  • Shawn Giordano - VP of Sales

  • Yes.

  • Thank you, Simon.

  • We are currently exploring partnerships with our distribution partners around this area of expertise and making investments.

  • We definitely see the opportunity here.

  • We just have to make sure it's the right fit for our organization, so we're going to go through those motions in this quarter and look to make future investments in possibly Q1, Q2 of next year.

  • Jim Devlin - Analyst

  • Okay.

  • And then my last question is kind of a difficult one, which is, I understand, and you know how we've been very long shareholders in this Company.

  • We have at least one client that owns more than 5% of the outstanding shares.

  • We have two clients that own anywhere from 3% to 4.5% of the Company.

  • And we have hundreds of retail clients that own hundreds of thousands of shares of your paper.

  • No question you guys have been doing a great job managing the business.

  • But, at the end of the day, everyone is judged by the price of the stock.

  • Simon Nynens - Chairman, CEO

  • Correct.

  • Jim Devlin - Analyst

  • Now, you take away the cash from the enterprise value of the business, the business, ex a cash right now is selling for less than $20 million, about $18.5 million, $19 million as the stock is trading as we speak.

  • We have $155 million trailing 12-month revenue line, which means the Company's business operations are selling at about $0.12 on the $1.00 on a price to sales basis.

  • Bankrupt companies sell at better valuations than that.

  • Now, we are earning money.

  • We're paying a healthy dividend.

  • You guys are doing an excellent job blocking and tackling; landing the deals; overcoming the VMware situation; and doing the best thing for the business.

  • Part of running a company though is you also have to be able to let the investment community know that the Company exists.

  • On a Board level, what are you guys doing to increase the Company's public relations, investor relations.

  • What do you guys plan on doing to get the word out?

  • Are you going to be speaking at any conferences?

  • Are we looking for any kind of research coverage?

  • Can you speak to that?

  • Simon Nynens - Chairman, CEO

  • Absolutely.

  • We continue to try to attract research coverage.

  • One thing we are not going to do because no one is interested in is paid research.

  • That's not an area that anyone is interested in.

  • I do firmly believe if you put the results on the table, the money will follow.

  • And we've seen that before and we will see that again.

  • I'm a firm believer in that.

  • It's a very open market.

  • The computer, to your point, the data lie.

  • The data is right there.

  • Anybody with a calculator can come up with this and see that we are a great stock to have and a great stock to continue to hold.

  • In terms of investor conferences, we're going to be at Needham in January.

  • Continue to be interested in speaking to any investors that we can.

  • And I have many calls with investors who are interested.

  • Having that said, the largest of the largest companies have issues right now with their share prices and they're trying to do everything they can to get up and running again.

  • So at least I feel like we are not the only ones.

  • Having that said, am I disappointed in the stock price?

  • Absolutely I am.

  • I think we're a great Company and we are worth a hell of a lot more than we were currently priced at.

  • But --

  • Jim Devlin - Analyst

  • I mean, Simon, that being said, $0.12 on the $1.00 priced to sales -- and again, I think you guys are doing a great job running the business.

  • No question about it.

  • The average company and the publicly traded market sells at 1.5 times revenue.

  • Simon Nynens - Chairman, CEO

  • Right.

  • Jim Devlin - Analyst

  • You're selling at -- we're selling at $0.12 on the $1.00 on a price to sales basis.

  • Simon Nynens - Chairman, CEO

  • Yes.

  • Jim Devlin - Analyst

  • This continues to be the cheapest company that I'm invested in.

  • What I'm trying to understand is how do we get the word out?

  • Would you, again, pay for play research, agree is a waste of time and money and effort.

  • Would you guys look to hire an investor relations firm, get out on the road, tell the story?

  • Simon Nynens - Chairman, CEO

  • I've looked at some appraisals.

  • I'm not going to do that for $200,000.

  • I'm not going to do that.

  • I'm not going to spend $200,000 on it.

  • I'd much rather build an international presence for that kind of money.

  • Jim Devlin - Analyst

  • But for $200,000 -- I don't believe it costs that kind of money.

  • I think you could do it for less than $5,000 a month, come in at like $50,000 a year.

  • Simon Nynens - Chairman, CEO

  • Again, we continue to look it that at a Board level.

  • And you know, eventually, again, like I said, eventually the money follows the data, so we continue to focus on our business.

  • I think that's the best investment on our time in.

  • I'm a long-term shareholder; I'm a large shareholder; I'm the second largest shareholder in this Company.

  • I can tell you, am I frustrated with the price?

  • Yes.

  • But do I get a great dividend?

  • Yes.

  • Am I going to hold the stock?

  • Absolutely, because I just believe in the future of our Company.

  • While we are all waiting for that stock price to improve, we have a very healthy dividend yield.

  • Jim Devlin - Analyst

  • Agreed.

  • Agreed.

  • Again, it's a difficult discussion -- it's a difficult thing to broach, and again, you do own a lot of stock.

  • I'm just saying that I think it's unfortunate that nobody else in the investment community recognizes that fact.

  • Simon Nynens - Chairman, CEO

  • I agree.

  • And the same thing, by the way, goes on the software publisher side.

  • If I see on any of the software publishers have issues with their mainstream distributors, I'm thinking why not more and more?

  • And that's what we're currently doing.

  • We are building on that.

  • We're going out to these conferences.

  • And again, if I would go on sales calls, out of the 10 new people that we talk to, if nine of them would say we're good; I'm not looking to add new distributors.

  • No; seven out of the 10 that we talk to are saying we're very frustrated with the service we are currently getting.

  • But what are you offering?

  • Is it just you're saying you're going to be good?

  • We give them references.

  • They do their research.

  • Now it takes a long time for them to switch their business over.

  • But more and more are doing that.

  • Have done in this year, and we expect more and more to do so next year.

  • So I'm not only frustrated in terms of the investor side of it.

  • I'm also frustrated because I think we offer our customers, for instance, great service.

  • New York area, that's why added the outside sales reps now.

  • Go outside.

  • Tell the story of our Company.

  • We have a great Company.

  • People don't leave our Company.

  • We got a great team here.

  • Go out; sell our story; absolutely.

  • That's what we are doing.

  • That's the strategy for next year.

  • Go out and tell our story, not only to the investors, also to our vendors and our customers.

  • Jim Devlin - Analyst

  • All right, Simon, again, congratulations.

  • The margins look excellent.

  • I hope they continue that way.

  • I don't mean to by any means detract from the excellent job you guys are doing managerially.

  • It's just frustrating to see the stock trade at the type of metrics that it is.

  • Simon Nynens - Chairman, CEO

  • I totally agree, and we're working hard on that to correct it.

  • Jim Devlin - Analyst

  • All right, Simon.

  • Thank you.

  • Have a great quarter.

  • Operator

  • Peter [Jeffra], [Jeffra Management].

  • Peter Jeffra - Analyst

  • Hi, Simon.

  • Again, kudos for the quarter.

  • You did a great job in a tough environment, especially with the VM slippage.

  • I guess the numbers -- my first question is with the VM numbers not being in there next year, give better comparisons going forward?

  • Simon Nynens - Chairman, CEO

  • Absolutely.

  • Yes.

  • Absolutely.

  • And again, as you saw in the third quarter too, excluding VMware, we grew our revenue on the Lifeboat side 9%.

  • And as the gentleman referred to earlier, excluding VMware, our gross margin was flat to slightly up.

  • The main reason for that is that continued pricing pressure.

  • We do see more and more people dropping distributors, as well as going to us on an exclusive basis.

  • So that we do look forward, A, signing on more software publishers; and B, getting away a little from this pricing pressure in terms of either less distributors or coming to us as an exclusive.

  • We are fighting hard for that.

  • And Dan, maybe you want to add to that?

  • Dan Jamieson - VP, General Manager

  • Yes, just to add quickly, Peter, and also going back to Jim's first question, I think what's very reflective of how well we have done in the virtualization space regardless of our -- the transition with VMware, which, by the way, was a great run together.

  • It was just time to go -- it just didn't make sense for us to be in that space where the attrition rate on the margin was being played so heavily by the [grow lines].

  • But, over the past year, we continued over the course of a decade to sign up 25 plus third-party tool vendors within the virtualization space, being the first distributor for I would say 95%, 98% of those.

  • And we have not lost -- we have not had one of those partnerships go away.

  • If anything, we have deepened and broadened the scope of those partnerships.

  • So I think that I'm very proud of that; it is very reflective of our dedication and the expertise of our team here.

  • Peter Jeffra - Analyst

  • Okay.

  • That's a full answer and I appreciate it.

  • My other thought was I'm perplexed, as the gentleman just said before us, that the stock is grossly undervalued.

  • It has a huge yield compared to its intrinsic value as a company.

  • And on the one hand I want it to stay down so I can buy more; get the yield return and have the opportunity.

  • On the other hand, after I buy enough I would like it to go up.

  • The question is what's -- and you can't buy it in size, so it takes forever to buy enough to make a difference.

  • But my question is, who's your investment banking firm at the moment?

  • And who do you have in the street that has research products out on this Company at the moment?

  • Simon Nynens - Chairman, CEO

  • Research?

  • We do not have paid (multiple speakers)

  • Peter Jeffra - Analyst

  • Not paid.

  • Is there any firm that follows the Company and that has written it up that's in the public domain?

  • Simon Nynens - Chairman, CEO

  • No.

  • Not currently.

  • Our investment banker is Needham & Company in New York.

  • Peter Jeffra - Analyst

  • I would talk to them about getting the story out.

  • Simon Nynens - Chairman, CEO

  • Oh, absolutely.

  • And again, we are going to a lot of these [hatch phones.] But as you, I'm sure you are well aware, a lot of hatch phones in New York have had issues larger than our Company.

  • So it's just in terms of who do we go out to and who are good people to talk to?

  • And I think one of the things that we continue to do is A, have these conference calls; and B, try to see as many investors and customers and publishers as we can.

  • Peter Jeffra - Analyst

  • Good luck with that and the business seems to be on a very fast track, so good year, and good luck in the future.

  • Simon Nynens - Chairman, CEO

  • Thank you, sir.

  • Appreciate it.

  • Have a good weekend.

  • Operator

  • [Daryl Rand], [Patchville].

  • Daryl Rand - Analyst

  • Simon, I have three questions for you.

  • The first question is year to date, the number of new vendors added to Lifeboat's line card looks to be about half the number it was last year.

  • Describe the environment in terms of why the sign-ups for new members at Lifeboat seems substantially less than it was last year.

  • Simon Nynens - Chairman, CEO

  • That's a little bit of deceiving data because of the size of the contracts that we have signed on.

  • For instance, you cannot compare a small software publisher to SAP BusinessObjects that we signed on this year.

  • So the larger deals take longer to sign on, however, represent a much broader revenue opportunity for us and much more focus from us in terms of the sales side.

  • That does not mean that -- because we are, to Dan's point, the first distributor for many of these smaller software publishers, and we continue to be.

  • So, you can't say every software publisher represents $0.5 million or $1 million revenue opportunity, so, therefore, less software publishers is less opportunity.

  • That data doesn't work.

  • But Dan, if you want to add to that?

  • Dan Jamieson - VP, General Manager

  • Yes.

  • Thanks, Simon.

  • It's a good question, Donald.

  • And this year, especially, talking to our team, it's always important to decide who you want to work with.

  • But this year, more so than any other year, it's been just as important, probably more important, to decide who you don't want to work with.

  • So we've been really thoughtful and focused on making sure that the partnerships that we entered would deliver maximum effectiveness.

  • So when we have concentrated our creative business energy on the partnerships we could make that translate to a mutually profitable, long-term, enduring partnerships with these folks.

  • So it's also been during this climate through this year, we've been very stringent in the partnerships we've entered.

  • Simon Nynens - Chairman, CEO

  • And again, if you look at some of the software publishers, what they've come up with is okay, maybe we want to add you as our sixth distributor.

  • We're saying we're not going to do that because then we're going to be your customer service support team for everybody else.

  • If there are prizefighters in there, we would like to go in if you lower the amount of distributors you work with.

  • Or if we can work with you in an exclusive sense.

  • Those are good partnerships both for a software publisher and for us.

  • If you ask us to compete at 1% margins, no, we're not.

  • Daryl Rand - Analyst

  • It just seems that '08 there were a significant number of sign-ups.

  • And granted, not all of them were BusinessObjects, like you had this year, but you have some Virtual Iron and FalconStor and Quest; I mean some very significant sign-ups.

  • And I look at the sign-ups this year and I say hum, it's kind of mediocre with the exception of B.I.

  • solutions.

  • So I'm kind of scratching my head and saying hum, was this year just a much more difficult year to get people to buy into our business model?

  • Simon Nynens - Chairman, CEO

  • No.

  • Actually not.

  • I actually see at accelerate, especially in looking at the pipeline of people we have signed up; but again, it takes awhile; it takes a long time for these people to sign the contracts.

  • If you look at the pipeline for 2010, I think that's a very strong pipeline.

  • Now, cross our fingers.

  • Again, I want to sign that on the dotted line and then, you know, you're never sure until you do sign on that dotted line.

  • I don't see that at all.

  • And I think 90% revenue growth excluding VMware, that's a pretty good number.

  • Daryl Rand - Analyst

  • Yes, no, it is an excellent number.

  • I'm just thinking we need -- in order to grow the business, we need to sign as many significant publishers as we possibly can.

  • And it seems like 2009 in terms of signing up significant new publishers in relation to 2008 seems a lot less.

  • And --

  • Simon Nynens - Chairman, CEO

  • Also keep in mind that, for instance, the great relationships that Dan talked about, like Veeam we signed on in 2008, it is only now that we really start going with these software publishers.

  • It takes a while for us to get up and running.

  • Once we have them up and running, that really accelerates into future growth.

  • So again, I don't want to focus on -- we've talked about this before.

  • I don't want to focus on telling everybody if we don't sign up 50, then it's a failure.

  • If we do sign up 50 -- because what people do then, and we've had it done before in the past, we incentivize people here internally to sign up as many software publishers as we can.

  • What we got was we were number seven in the distribution agreement for a Company that totally didn't make sense for us to enter into a distribution agreement.

  • I'm not chasing distribution agreements for signing distribution agreement sake.

  • I'm signing it so I can have a long-term, very profitable relationship, both for our software publisher and us.

  • That's what we're interested in.

  • And maybe that takes a little extra time, and it's well worth it.

  • Daryl Rand - Analyst

  • Second question on programmers, is any of the year-over-year decline in programmers due to sales turnover, or was it all a function of large deals being signed last year?

  • Simon Nynens - Chairman, CEO

  • If you look at -- if you peel that, you look at the transition in business in terms of strong growth in TechXtend, people really want a value add in these times.

  • You cannot go to them with a script and say, oh, it will be $0.10 cheaper this week; buy now.

  • People really want to see the value that you bring to the table.

  • So we've seen that with TechXtend, where we have bundled hardware, software and consultancy services.

  • We go out to companies; we visit them.

  • It's a longer sales cycle but the opportunities are A, larger than the typical deals that we have before; and B, the margins are typically higher.

  • But if you look at the typical programmers business, so to say in terms of the $1000 to $2000 product that we sell on the Internet, that's definitely very tough time on that in Q3.

  • Daryl Rand - Analyst

  • So it's not due to sales turnover then within the Programmers business, Simon?

  • Simon Nynens - Chairman, CEO

  • No, no.

  • Daryl Rand - Analyst

  • So then it's more due to -- because in essence the second half of last year, both third and fourth quarter were very substantial for Programmers.

  • So I presume there were special -- not special -- there were several large deals in there that basically you are not seeing this year.

  • Simon Nynens - Chairman, CEO

  • Correct.

  • In Q4, especially Q4 last year was impacted by several huge software deals.

  • Daryl Rand - Analyst

  • Last question.

  • You are coming up on the one-year anniversary of some of the large, long-term receivable contracts you wrote with your customers.

  • Shed some light on delinquency.

  • Is there an expectation then that a lot, not a lot, a meaningful portion of those receivables are going to convert into cash in the fourth quarter because you are coming up on the one-year anniversaries?

  • Simon Nynens - Chairman, CEO

  • Yes; and especially during this -- that's a good question.

  • Because especially we went through this N.G.

  • sale in the third quarter.

  • Because especially during these tough economic times, a deal comes around for a couple of million dollars and you're really -- we are really taking a close look at it because we need it as much as all our competitors need it as well.

  • We want to be flexible, but the one thing that I know that I'm sure of is cash is king right now.

  • And we do not want to incur a large credit risk.

  • The margins that we charge on these large software deals are not such that I can carry a large credit risk.

  • A delinquency -- Kevin can go into that -- but there were none this year.

  • Kevin Scull - VP, Principal Financial Officer, CAO

  • There's been none to date.

  • And the names we typically do these deals with are household names, so that we've had no credit risk.

  • And we continually monitor; any time they put out an earnings release, we look at it.

  • We've had no -- knock on wood -- we've had no problems to date.

  • And the deals from last Q4 are going to -- some of them are going to pay in Q4 this year, but the bulk of them will fall onto Q1 of next year.

  • But it depends on the volume of the deals whether we will see an uptick in cash or not.

  • Simon Nynens - Chairman, CEO

  • Right.

  • Daryl Rand - Analyst

  • But the expectation is that you are not going to be writing the same size deals this year that you did last year, and, therefore, a meaningful portion of this should convert to cash in the next six months?

  • Simon Nynens - Chairman, CEO

  • I'm not sure in terms of like I don't have that forward-looking guidance in terms of -- the pipeline looks healthy, so I don't know if we're not going to sign the same amount of deals.

  • That's what we are striving for.

  • So definitely that's what we are striving for, to close the same amount of deals now.

  • And to your point, it's a very tough comparison compared to last year, especially in Q4.

  • We had some really large deals in Programmers.

  • That's what we are striving for.

  • So, I can't say that, like we're going to return back to cash or yes or no.

  • Daryl Rand - Analyst

  • Okay, thank you.

  • Simon Nynens - Chairman, CEO

  • You're welcome.

  • Have a good weekend.

  • Operator

  • Steve Emerson, Emerson Investment.

  • Steve Emerson - Analyst

  • First of all, I missed your opening comments, so if you addressed the gross margin points I'm going to cover, please correct me and I'll hit you offline.

  • What I'm trying to figure out is to what extent non-VMware gross margins are coming down and by how many points?

  • Back of the envelope, I can take $12 million out of revenues and year over year, gross margins have come down from 14.7% to 11.7%.

  • I'm sure that's not right.

  • And of course, I am lumping in Programmers in that.

  • But I'm -- two questions.

  • Margin pressure?

  • And how much in gross margin dollars for the last-year quarter did we walk away from?

  • Simon Nynens - Chairman, CEO

  • Steve, for your information as well, there is a replay available.

  • I think (multiple speakers) this afternoon.

  • Steve Emerson - Analyst

  • I know.

  • Simon Nynens - Chairman, CEO

  • But just to answer your question, last year in Q3 of '08, in Lifeboat -- $8.2 million in terms of revenue was $250,000 in gross margin.

  • That's what we had on the VMware side in distribution.

  • In terms of margin pressure, we see continued margin pressure.

  • Again, our large competitors that just reported this week as well, the main distributors, some of the main distributors who reported earnings that were down 42% and 83% down.

  • A lot of competitors are, in terms of the Programmer's Paradise [site], reporting loss instead of profit last year.

  • So it's a very tough economic climate out there.

  • The definitely -- the gross margin pressure continues to be of concern to us.

  • However, the way we want to counter that is adding new lines as well as pressuring the people that we currently work with to say are we providing great service to you?

  • Yes.

  • Would you, therefore, be likely to drop one of these prizefighters?

  • So that's our strategy in terms of providing the value that we provide to a software publisher, can we get recognition for that?

  • So in terms of the gross margin, yes, there absolutely is pricing pressure on that.

  • I think the large deals too, you know, they can sometimes qualify as for rebate on all the business that we do with certain software publishers.

  • So then rebate levels are positively influenced, and that could trigger higher payouts in terms of the rebate.

  • So it's all a function of lower deals, higher deals with lower margin.

  • It's all a function of that.

  • Steve Emerson - Analyst

  • Well then you have done an excellent job.

  • On a real apples to apples, you did $3.7 million in gross profits versus $4 million, which is really holding the line.

  • The second question is, how much investment spending did you do in your SG&A in terms of hirings and so forth that really are investments in future years?

  • I know your SG&A was down significantly, which is excellent expense control.

  • But I'm looking to what in addition you spent for the future that is really a non-continuing expense?

  • Simon Nynens - Chairman, CEO

  • We looked at that at the beginning of the year; we had an internal meeting, where we told everybody we are not going to lay off large amounts of people to make our kinds of bonuses.

  • So I went out to the employees and stated that very clearly to them that we are not going to lower the expenses only in order to make our own bonuses.

  • We are in this together.

  • We decided that we were going to try to hold off laying -- having any major restructurings unless we really saw the signs on the wall.

  • We didn't see that.

  • And I'm very happy to report that we did not have to have any significant layoffs.

  • And in fact, we are expanding in terms of TechXtend outside sales presence.

  • Because I do believe that once this tide turns, we have the people.

  • We don't have to retrain anybody.

  • We have the people here in-house.

  • I think as long as I have been here, I've known these people.

  • They have put in hard work.

  • They deserve to be here, and they deserve to go up with us again and benefit from that.

  • Having that said, anybody that doesn't want to work and that comes in late and goes home early, will be let go.

  • But that doesn't have anything to do with major restructurings in order to pad the numbers.

  • We didn't do that.

  • I'm pleased to say that the cost control was a result of lower commissions, lower expenses, lower non-discretionary spending, all sorts of expense.

  • We're very tight on that.

  • I don't like to lay off people just to make my numbers.

  • So we did not do that.

  • I just want to be clear about that.

  • Steve Emerson - Analyst

  • Excellent.

  • So we are ready for the future.

  • Let's hope that Q4 is a normal seasonal Q4.

  • And on that note, when you talk to your customers, is your sales force, are you getting the sense that you are going to have normal seasonality in Q4?

  • Or just too soon to get that sense?

  • Simon Nynens - Chairman, CEO

  • It's still a little early to get that sense, Steve.

  • And again because our business is so driven by that third month, that is still early.

  • Steve Emerson - Analyst

  • Okay.

  • Thank you very much, and keep up the great work.

  • Simon Nynens - Chairman, CEO

  • Thank you, sir.

  • Have a good weekend.

  • Operator

  • Jim Devlin, Henley & Company.

  • Jim Devlin - Analyst

  • Hi, just one more follow-up question.

  • We've talked about this in the past, but just to get a sense, I know you guys have mentioned in the past that you have a pretty good working idea of where nearly most of the development community in software resides in the United States; basically, where each developer sits, if you will.

  • Speaking to that, how many clients do you guys think you have in your working database?

  • Like how many clients do you think that you actively do business with at this point?

  • Simon Nynens - Chairman, CEO

  • In terms of our database, we send out, I believe, e-mails to about 100,000 people on a biweekly -- more than 100,000 -- and that is on the Programmer's side.

  • So the developers that we touch as well as companies, over 100,000 contacts every single -- we've mailed to catalogs, huge numbers that we've had in the past are now transitioning more and more to the online communications.

  • We have a database.

  • We have one of the databases where people keep going back and back in terms of previous versions.

  • In terms of Programmer's Paradise, I think there's 60,000 accounts that we have over the last four years of people do [investment] with us?

  • Kevin Scull - VP, Principal Financial Officer, CAO

  • Actually it's over 120,000..

  • Simon Nynens - Chairman, CEO

  • It's 120,000.

  • So, that's our database.

  • And to your point, if you are a developer, you have to look at our revenue in Programmer's Paradise.

  • We know where the developers are.

  • Jim Devlin - Analyst

  • That's great.

  • Okay, guys.

  • Thanks.

  • Simon Nynens - Chairman, CEO

  • You're welcome.

  • Have a good weekend.

  • Operator

  • [Peter Lux], a Private Investor.

  • Peter Lux - Private Investor

  • The prevailing thought out in the world is that in the enterprise space, there's a lot of spending that has not happened and some of the product is aging and is going to be re-billed come the new millennium.

  • Does this affect you?

  • And will they be adding the kind of products into the kind of spending that will benefit you in the enterprise world?

  • Simon Nynens - Chairman, CEO

  • If people start to invest in terms of hardware, and we will now benefit from that.

  • But as I said previously, people buy a new computer, and at that point, they have to reload all the previous applications that they had on their old machine, so to say, at which point they say A, do I really need it?

  • Or B, if I do need it, let's get the new version.

  • And we'll benefit from that second step.

  • Peter Lux - Private Investor

  • Okay.

  • Good job.

  • And see you down the road.

  • Simon Nynens - Chairman, CEO

  • Thank you.

  • Have a good weekend.

  • Peter Lux - Private Investor

  • Jimmy, give me a call.

  • Simon Nynens - Chairman, CEO

  • Absolutely.

  • Operator

  • I'm showing no further questions at this time.

  • Simon Nynens - Chairman, CEO

  • All right.

  • I would like to thank everybody for their interest in our Company.

  • And as I said before, we look forward to talking to you in the future.

  • Operator

  • Ladies and gentlemen, this concludes our conference call for today.

  • You may all disconnect and have a wonderful day.