Climb Global Solutions Inc (CLMB) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Wayside Technology Group conference call. (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, Nathalie Turner. Ms. Turner, you may begin your conference at this time.

Thank you and good morning. Welcome to Wayside Technology's second-quarter 2012 earnings call.

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

We released earnings for the second quarter at approximately 5 p.m. Eastern time Thursday, July 26, 2012. The earnings release is available on the Company's investor relations website at WaysideTechnology.com. Today's call, including all questions and answers, is being webcast live and can be accessed via the website earnings.com. A rebroadcast of this call will be available at WaysideTechnology.com.

This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, July 27, 2012. A detailed discussion of risks and uncertainties are discussed in our forms 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'd like to turn the call over to Simon.

Thank you, Nathalie. Good morning, everybody.

We delivered solid results this quarter. We strengthened our position in the software distribution market and we continue to sign on new vendors.

We also maintained our focus on costs, which allowed us to drive a solid earnings performance. We continue to have one of the most conservative balance sheets as a public company and do not have a current need for debt. We have the tools in place to add more publishers, including a great team and a great IT infrastructure. And although we cannot influence the larger economic forces that are currently at work, we do look forward with great confidence in our team.

Now I would like to hand it over to Dan Jamieson, our Vice President and General Manager of our Lifeboat division. Dan?

Thank you, Simon.

Lifeboat's Q2 2012 results reflect positive year-over-year growth in revenue, but also reflect negative year-over-year results in margin and income from operations. The key factors in Lifeboat's Q2 revenue growth were the successful penetration and expansion of pivotal software lines within a variety of Lifeboat's premier reseller accounts, the LARs, the large account resellers, and DMRs, the direct market resellers, along with the successful expansion of business within targeted solution provider accounts, including VARs, the value-added resellers, SIs, the systems integrators, and other consultancy-type companies. The decline in margin and income from operations is primarily attributable to the nonattainment of rebates, along with continuing margin pressure.

Lifeboat signed three new distribution agreements in Q2. These new agreements will strengthen Lifeboat's portfolio and enhance our focus on our go-to-market concentration areas, including virtualization, security, application lifecycle management, database infrastructure, application and network infrastructure, and business productivity. Thank you, Simon.

Thank you, Dan. Now I would like to hand it over to Shawn Giordano, our Vice President of our TechXtend division. Shawn?

Thank you, Simon.

The TechXtend sales team performed exceptionally well in the second quarter, resulting in increases in revenue, gross margin, and income from operations. Despite the overall economic environment and, as a result, a smaller pipeline, we won a larger percentage of deals. We believe this was due to the tireless efforts of our sales team. These efforts have resulted in increases in large transactions, those defined over $50,000, as well as increases in our software renewal rates.

In addition, we've seen greater account penetration and acquisition of new clients. We operate in a very competitive landscape, and our ability to be flexible as we help clients in the areas of virtualization and cloud, storage and data management, business intelligence, and information management continues to help us build on our reputation of being a trusted advisor.

In conclusion, I'd like to thank all of our back office and marketing support teams. Without their hard work, our success would not be possible.

Thank you, Shawn. I would like now to ask Kevin Scull to go over the financial numbers. Kevin?

Thank you, Simon, and good morning, everyone. I will discuss our second-quarter financial results on a Companywide basis, as well as per segment.

Net sales were $69.2 million, compared to $60.7 million last year, representing a 14% increase. Sales for our Lifeboat segment were $53.5 million, compared to $49 million last year, representing a 9% increase. Sales for our TechXtend segment were $15.6 million, compared to $11.7 million last year, representing a 33% increase. This increase in sales through our TechXtend segment was driven by increased extended term and LARs sales transactions during the term -- the quarter.

Gross profit remained unchanged at $5.6 million compared to last year. Gross profit as a percentage of sales was 8.1% compared to 9.2% last year. The decrease in gross profit as a percentage of sales was the result of lower rebates and competitive pricing pressure. Gross profit as a percentage of sales for our Lifeboat segment was 7.2% compared to 8.8% last year. Gross profit as a percentage of sales for our TechXtend segment was 11.2% compared to 11.1% last year.

Total selling, general, and administrative, SG&A, expenses were $3.5 million compared to $3.6 million last year. As a percentage of sales, SG&A expenses were 5.1% compared to 6% last year. Selling costs increased by $55,000, the result of increased volume and the Company's investing in and rewarding employees for sales growth.

Our net income amounted to $2.3 million compared to $2.1 million last year. On a fully diluted basis, our earnings per share were $0.28 per share compared to the prior year at $0.26 per share.

Now moving on to the balance sheet, compared to our year-end balance sheet the following accounts had significant fluctuations. Accounts Receivable current and long term increased by $4 million, primarily due to the timing of payments by our larger customers. Cash and marketable securities decreased by $1.8 million, mainly due to the increase in Accounts Receivable. Prepaid expenses and other current assets decreased by $740,000 on lower rebate receivable.

During the quarter, we repurchased approximately 4,200 shares, and we still have authorization to buy back an additional 394,000 shares. Our book value per share is $6.48 and equity now stands at $30.5 million. Cash and marketable securities make up 42% of equity, and our working capital at the end of the quarter amounted to $20.3 million.

This concludes my remarks. Simon, back to you.

Thank you, Kevin. Now before we start with the Q&A session, I wanted to make one more comment.

We thank our vendors, the software publishers, for their trust and partnership during these challenging economic times. Times are tough in our industry, yet we are a flexible, proactive, and knowledgeable partner who likes to act and does act like an extension of a vendor sales and marketing team. And that is currently working very well.

We remain focused on adding new publishers, providing our customers with excellent customer service, and providing our employees with a great and rewarding working environment. We look forward with great confidence in the people who make these results possible, our team here at Wayside Technology Group, and to them I say thank you for your hard work during this past quarter and thank you for your continued passion to win.

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

(Operator Instructions). [Aaron Lehman], private investor.

Good morning. Thank you for delivering a wonderful quarter in light of the economy. Could you give us some insight as to the -- what the situation in Europe, European arena, has been for you? And also, what is the prospect for margin improvement going forward?

So the European environment for us is we've seen increases, yet we are a very small percentage of the overall European market.

We primarily operate in the northern European part, you know, Germany, the Netherlands, Nordic countries, UK. France and Italy as well, but a smaller percentage. The strongest -- our strongest markets are also currently the strongest markets in Europe.

We've seen an increase there -- continue to see an increase. Even as our overall sales increased by 14%, our European and international sales also increased at that same percentage, so currently as a percentage of sales our international sales still stand at 15%, which is, I think, quite an accomplishment.

We -- I look at the current European environment for our specific lines that we carry as the same as in this quarter, still great possibilities to grow and expand our offerings in Europe. Having that said, it's not the largest portion of our business.

The largest portion of our business is in North America. And for that, we see in terms of margin pressure, you might ask, is that going to be intensified? I see the margin pressure as now stabilized, or as I think as low as it hopefully will -- knock on wood -- but hopefully as low as it will go. That's what we are currently seeing.

A lot of our competition is also currently or will shortly provide numbers, and what we hear from our broad stream competitors is the same what we face, is margin pressure, and everybody is looking to increase their margin, which is good for us because that might mean they are increasing their fees and people on the fence currently about joining us might push them into our arms and we work with a different model. So I think that will be very good for a software publisher, as well as for us.

Jeff Geygan, Milwaukee Private Wealth Management.

I'm going to ask -- since I can only ask one question, I'm going to make this two-part.

You can ask more questions, but it's just one session of questions, just to clarify that.

Oh, I appreciate that. In your release, you state, we continue to increase our market share and grow our service offerings. Can you -- what do you believe your market share is presently and how do you measure that?

Okay. So currently our market share is a rounding error in the overall software industry.

We -- if we look at the overall industry and to really peel off some layers, what we are really operating in is in the software industry, and for the software industry we've become a percentage, still I think a rounding error.

We have great ways to grow in terms of the lines that we carry, and we firmly believe that that's where we're going to go. Just have to make sure it's profitable, and there's a reasonable chance of making a win-win situation for both us and a software publisher. So that's where we are currently at.

In terms of how do we measure that, basically the feedback from our software publishers in terms of who is their overall distributor and what is the percentage of sales that a certain distributor -- now mind you, some software publishers have a model that is 80% direct, 20% through the channel, but of that 20% they report on a quarterly or semiannual basis back to the distributors who the largest is, where do we rank? And based on those reports, we see our market share increasing, as well as the fact that we report 14% increase in revenues whereas most of our competition is flat or slightly down.

I see. And when you think of market share, are you really thinking about that 20% slice of the total market is your potential market share?

No. People ask us, who is your main competition? I would say twofold. One is the software publishers themselves going direct. Two is the other distributors and other resellers when it comes to the TechXtend division.

What we do a little different than our competition is we work hand in hand with software publishers, and a lot of distributors and a lot of resellers shy away from this as if they feel that they could possibly take it direct, whereas we are flexible enough to work with them to facilitate some deals going direct, facilitate some deals going through the channel. And again, that's because of our specialty in terms of software distribution. We understand the -- sometimes there are just -- they have to go direct or they have to go through another channel, and we see the overall relationship and partnership as more important than winning one deal or fighting over whether or not this deal is going to go direct.

So that's how we handle the direct versus indirect business. I don't see us as going after the 20%. We potentially want to present our value, and we firmly believe if a software publisher sees our value and that typically happens over a longer period of time, they do go indirect because that's the way to grow. Their specialty is develop the best software possible in their field. Our specialty is to bring that software as effectively and efficiently to market.

Thank you. The press release goes on to talk about your expanding virtual infrastructure-centric business. Can you describe the outlook for that segment? And then, how much of your total revs are currently coming from those types of sales?

Okay, so we don't provide the segments that we -- we have segment reporting in terms of the overall sales of Lifeboat. We don't report, but we do internally track the revenue by sector. And Dan Jamieson can definitely go into more in terms of what we see out there on the horizon in terms of virtual infrastructure.

Absolutely. Thank you, Simon.

Yes, virtualization is basically explosive trajectory space for us for over a decade now. We got out of the gate. We were VMware's first-ever distributor. We shepherded them into a two-tier model, and along the course of 10 to 12 years here, we've signed agreements and forged partnerships with over 25-plus third-party tool vendors in the virtualization space.

So we continue to focus on it. I really believe, and we believe, that it's relatively still in its genesis. When you look at the overall penetration and the overall implementation of virtualization, there's still a long way to go. There's a lot of exciting new companies coming out in this space. We have the talented and trained professionals here that know how to support virtualization opportunities. So we look -- we're very optimistic about the virtualization space.

All right, and I'll cut it off after this final question. Simon, your press release talks about lower vendor rebate attainments. Do you believe this is a temporary condition within your industry or is this the so-called new normal for you with respect to your rebate agreements with your various publishers?

I'll answer that with some history. If you look at our rebates, in 2010 we started to earn for our Company considerable rebates, and we knew that if -- they were set on pretty aggressive sales goals from our publishers. And they -- these sales goals, like we reported in our press release, also periodically get increased. Sometimes not too much, but sometimes substantially.

And as a result of that, I thought it would be most prudent to include the amount of rebate that we earned in our quarterly and our yearly press releases to give investors a feel of what that portion of our income is. And if you look at that in Q2 in 2010, $700,000; in Q3, $600,000, of 2010; in Q4 of 2010, $1 million; in Q1 of 2011, $300,000; in Q2 of 2011, $800,000; in Q3 of 2011, $700,000; in Q4 of 2011, $800,000; in Q1 of this year, $500,000; and Q2 of this year, $400,000.

Now in terms of the overall environment for rebates, times are very tough. The overall goals in terms of the overall rebates, some of them are altered so I would say there is the new -- this is the reality right now as it is, and I expect the level of rebates in the coming quarters to be similar to what we earned in this quarter, not what we earned in last year's quarter Q3 and Q4.

But the goals are still there, and I think as soon as this economy turns and we are able to reach those goals again, I think the amount in terms of dollars will go up. As a percentage, I think this is the new reality.

Thank you.

(Operator Instructions). [Peter Lutz], private investor.

I've got to commend you guys for being remarkably consistent. In good times and bad times, you've been able to generate just significant growth in profitability and have paid significant dividends, and you and I have had conversations over the last decade. But if I look at the last decade, and I went back in September of, let's say, 2004, our stock was selling at $14 and change and now we're at $12.80, give or take. And so, I believe, and I am sure you believe, that our equity should be significantly higher, given our performance. So my question is, why are you and I the only ones who believe that?

Peter, I cannot speak for other stockholders. All I can tell you is (multiple speakers)

I'm not talking about stock. I am talking about the world, the world of investors. What's holding them back from embracing your record and the performance that this Company has given?

Okay. Well, Peter, to answer your question, I'll be just telling you what responsibilities I was assigned by the Board of this Company. I am the steward of this Company, and my job is to grow this Company and to safeguard its future and to make sure that we're still alive and growing in a couple of years.

That's what I'm here to do. That's -- those are the forces that I can influence and I'm being paid for, and I'm also going to be fired for if I don't live up to the expectations of the Board and of the shareholders.

I cannot speak for the world of investors, other than to -- I believe if we continue to -- and current economic times are tough, and I'm really proud of especially our TechXtend division for coming through. So tremendous effort and great sales performance in Q2. And I commend them for that. That's what we can influence.

I talk to people. I'm very positive, as positive as we can be. We talk to some conferences. In terms of what stocks people pick, people -- everybody was excited about Facebook. Okay, good, then invest in Facebook. Well, we see what happens there.

So I wish I could have figured that out. I would've made a lot of money outside of this company in terms of figuring out what investors saw in them. Unfortunately, I can't, and I'm not focused on it, other than delivering the best results that I can and doing the best I can, as well as the management team here, to represent our Company, and that is what we do.

But if you ask me we should invest $1 million in terms of going out to all the investor conferences and try to tout our stock as much as we can, listen, if you add up our cash and cash equivalents, $7.2 million; marketable securities, $5.6 million; you add the long-term -- Accounts Receivable long term, this is money that we loaned to our largest and most financially stable customers on the TechXtend division, and these are the largest companies in the US, so I would count that as cash.

Then you're talking about $22.3 million. Out of our total equity, that is 73%. Now if you deduct $22 million from our market cap and you compare it to our income from operations, we are talking about a P/E that is far less than four. I think that is very, very cheap and it's undervalued.

Well, that's the point I've been trying to say. Why -- what is holding the rest of everyone else who buy securities and do the various runs? What is the thing that holds them back to embrace this Company? I understand you can't read someone's minds or the investor mind. What is in your gut that tells you that? What is holding them back?

Well, Peter, why was the stock $14 a decade ago? I mean, people buy and sell. (Multiple speakers) I know overall, I know one thing. Financial performance, the share price will eventually follow performance. That is proven in any given research.

I know also that of the 14,000-plus public companies in the US, there is at least 2,000 just like us who have the same valuation as us. Now I don't want to be like them, but I know one thing. We continue to execute against our plan and we continue to build our Company, the share price will follow.

Now while you and I are waiting, we are getting paid a pretty nice dividend while we're waiting for that big payday to come. And I believe delivering results like we just did, considering these are results of our competitors, that has to have a positive effect on our share price.

One would think.

Well, you know, we will -- time will tell.

Take care of yourself.

[Donald Wong], [Tocoville].

Simon, so for many years now, we have, I think collectively, felt the stock does not reflect the value that you have created and your business team has created through growing the business.

And yet, we have all this cash that we are unwilling to significantly repurchase stock with. I know we've discussed this before, but it seems to me to be crying in our beer if we keep saying our stock is undervalued, but we are not willing to do anything about it.

So I think we should get off (multiple speakers) -- let me finish, Simon. I think we should get off the tack of saying our stock is cheap, it's undervalued. Because unless you are willing to buy back a lot of stock, it doesn't mean anything. Because that is the only proof point of you putting the capital you have on your balance sheet to work to demonstrate, yes, our stock is undervalued of what we think it could be worth and we are willing to put our cash behind it.

Okay, point taken.

Thank you, and I'm showing no further questions in the queue. Please continue with any closing remarks.

Thank you for your interest in our Company. We look forward to reporting our results in the next quarter.

This concludes today's conference call. You may disconnect at this time. Thank you for your participation.