Climb Global Solutions Inc (CLMB) 2012 Q3 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.

Please note that all callers are limited to one question each.

(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. Nathalie Turner.

Ms. Turner, you may begin your conference at this time.

Thank you, and good morning.

Welcome to Wayside Technology's third quarter 2012 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 comments about the webcast for this earnings call.

We released earnings for the third quarter at approximately 5 PM Eastern time Thursday, October 25, 2012.

The earnings release is available at 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 re-broadcast of this call will be available at waysidetechnology.com.

This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, October 26, 2012.

A detailed discussion of risks and uncertainties are discussed in our Form 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 Nynens.

Thank you, Natalie.

Good morning to everybody.

We delivered solid results this quarter.

Q3 was our best quarter year to date in terms of total revenue, total gross profit, income from operations and net income.

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.

In Q3, we added a chief financial officer to our executive management team.

Tom Flaherty was appointed as Chief Financial Officer in August 2012.

Tom is a CFO that specializes in early-stage and high-growth companies in the software and life science industries.

Tom reviews the served as Vice President of Finance of StemCyte, Inc., and before that as Corporate Controller at VPI Systems, Inc., an enterprise-class software company.

Prior to joining VPI Systems, Inc., Flaherty served as chief financial officer and founder of two startup companies and as a director of corporate accounting for Centennial Communications Corporation.

Flaherty is a CPA in New Jersey and began his career in public accounting and was an audit manager at Ernst & Young, LLP.

Tom will present our Q3 financial results later on in today's earnings call.

We have the tools in place to add more publishers, including a great team and a great IP 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 Q3 2012 results reflect positive year-over-year growth in revenue, but also reflect negative year-over-year results in margin.

The key factors in Lifeboat's Q3 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, value added resellers, and SIs, the systems integrators, and other consultancy type companies.

The decline in margin is primarily attributable to the non-attainment of rebates along with continuing margin pressure.

Lifeboat signed 11 new distribution agreements in Q3 2012.

These new agreements will strengthen Lifeboat's portfolio and enhance our focus in 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.

Thank you, Simon.

The TechXtend sales team delivered solid results in the third quarter, resulting in increases across all segments of the business including revenue, gross margin and income from operations.

In a very competitive landscape, our sales team continues to execute on our solutions-focused plan, increasing our market share and account penetration.

We are helping our clients solve their IT-related challenges in the areas of virtual addition, storage, data management, business intelligence and information management as well as mobile device management.

Additionally, we provide our clients some compelling service offerings which can help them recover IT budget and leverage new technologies more quickly within their organizations.

We continue to build on our reputation of being a trusted advisor to our clients.

Once again, I would like to thank all of our back-office and support teams.

Without their hard work, our success is not possible.

Thank you, Shawn.

Tom Flaherty, our CFO, will now report on the financial numbers.

Tom?

Thank you, Simon, and good morning, everyone.

I will discuss our third quarter financial results on a consolidated basis as well as by business segment.

Net sales for the third quarter of 2012 were $75.5 million compared to $63.7 million last year, representing a 19% increase on a consolidated basis.

Sales for our Lifeboat Distribution segment were $56 million compared to $49.1 million last year, representing a 14% increase.

This increase was mainly a result of strengthening our account penetrations, our continued focus on expanding virtual infrastructure-centric business and the addition of several key product lines during the quarter.

Sales for our TechXtend segment were $19.5 million compared to $14.6 million last year, representing a 34% increase.

The 34% increase was primarily due to an increase in larger extended payment term transactions, continued solution-focused selling and higher average order size in the third quarter of 2012.

On a consolidated basis, our gross profit decreased by 1%.

Our gross profit margin was 7.5% compared to 9% last year.

Lifeboat Distribution's gross profit decreased by 10% despite the 14% increase in revenues.

As was a result of Lifeboat's gross margin dropping from 8.4% last year to 6.6% in Q3.

Gross profit margin was impacted by lower vendor rebate attainment and continued pricing pressures within the segment.

Our TechXtend segment's gross profit increased by 21%.

Gross profit margin was 10.2% compared to 11.3% last year.

The increase in gross profit is due to increased sales volume at lower gross margins as compared to 2011 as well as lower vendor rebates.

Vendor rebates and discounts for the quarter ended September 30, 2012 amounted to $500,000 or 0.7% of net sales compared to $700,000 or 1.1% of net sales for the third quarter of 2011.

Vendor rebates are dependent on reaching certain targets set by our vendors.

Vendors have been periodically substantially increasing their target revenues for rebate eligibility.

Therefore, despite our increasing revenue, vendor rebates have declined.

The Company monitors profits and gross profit margins carefully.

Price competition in our market intensified in 2012 with competitors lowering their prices significantly.

The Company responded immediately.

Although our sales volume increased substantially as a result, the gross margins as well as the rebates and discounts that are material elements of the Company's overall profitability were negatively impacted.

We anticipate that margins as well as discounts and rebates for the remainder of the year will continue to be affected by this current trend.

Total selling, general and administrative expenses were $3.6 million compared to $3.5 million last year.

The increase in SG&A is primarily the result of an increase in sales commissions for our TechXtend segment and the addition of employees in sales, finance and operations to support business growth.

Our net income for the quarter was $1.4 million compared to $1.5 million last year, which is a 9% decrease.

Again, this was impacted by the decrease in gross profit margins.

Earnings per share on a fully diluted basis were $0.29 per share compared to $0.33 in the same quarter last year, representing a 12% decrease.

This was impacted by the decrease in net income plus higher weighted average common shares outstanding.

Moving on to the balance sheet, compared to our balance sheet at December 31, 2011, the following key accounts had fluctuations.

Cash and marketable securities are $15.3 million, an increase of $753,000.

This increase is primarily due to $3.1 million of cash flow from operations minus $2.2 million of dividends for the nine months ended September 30, 2012.

Accounts receivable current and long-term increased by 6% due to sales growth and an increase in volume of sales on extended payment terms.

Accounts payable and accrued expenses increased by 2% due to the increase in our operating expenses from growth of the business, offset by keeping our gold and silver vendors on good payment terms.

During the quarter, we repurchased approximately 29,000 shares of our common stock and still have authorization to buy back approximately 375,000 shares.

Our stockholders' equity now stands at $31.3 million.

Cash and marketable securities make up 49% of equity.

Our working capital at the end of the quarter amounted to $20.5 million.

At our October 23 Board meeting, the Board of Directors declared a $0.16 dividend per share for common stock payable November 16 to shareholders of record on November 6. I want to echo Simon's comments that Q3 has been the best quarter in 2012 year to date in terms of sales, gross profit dollars, income from operations and net income.

This concludes my remarks on our Q3 operating results.

Simon, back to you.

Thank you, Tom.

Now, before we start with the Q&A session, one more comment.

As we continue to grow on our path to become the most trusted and respected IT provider, we do not deviate from that long-term goal.

We are excited about the opportunities that we see in front of us, and we continue to grab them and execute on them.

We want to thank our vendors, the software publishers, for their trust and partnership.

We are flexible, proactive and knowledgeable partner who acts like an extension of a vendor sales and marketing team.

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 instructions) Nicholas Peters, Milwaukee Private.

I have a question regarding International Software Partners, your subsidiary.

I was hoping you would be able to shed a little bit more light on what exactly International Software Partners does, how it's different from your Lifeboat Division, and then if you could give a little color on the development and the growth and the revenues, where they currently stand.

Okay, so our International Software Partners division is a division that focuses on providing services that might not necessarily be able to be provided under the Lifeboat umbrella or under the TechXtend umbrella.

An example of that is Intel.com's software.

If you go to Intel.com and you click on buy software now, you're actually redirected to a site that we host as International Software Partners.

And we facilitate the back orders, the complete back-office services for that website.

In addition, lead programs, qualified leads, outreach to either end customers or to resellers -- something that we provide under that name.

The main reason to provide that under that name is to create -- be able to provide flexibility to our software partners.

They might have requests that not necessarily fit into a reseller or a distributor approach, but that's a company that prides itself on flexibility and the passion to basically be an extension of the sales and marketing team of our software publishers.

That is what we decided to do.

In terms of your question -- where does that revenue fall?

Depending on the division that it is closest to, we either book that revenue in Lifeboat Distribution or in TechXtend, because that's where it belongs.

So we do not currently split out that revenue.

Growth opportunities, we think, are great and we continue to reach out to more software publishers and inform them about what it is that we do as International Software Partners.

Again, stressing there is flexibility and being able to be a true extension of sales and marketing teams at our software publishers.

Okay.

Do you have any other large partners other than Intel?

Definitely in terms of International Software Partners, there are other services that we provide -- for instance, qualifying leads, reach out to end customers, etc.

And that's something that we look to, to branch out from, absolutely.

But again, the Intel, I think, is the best example of our flexibility in terms of what we could do.

And Dan, you might want to add to that?

Sure, Simon.

I think, in addition to that, we also provide renewals, follow-up in ISP as well.

To Simon's point, what it really affords us is a way to give to our vendors an option that there is one common challenge, a couple of common challenges we find with all of our partners.

It's just, to Simon's point, leads, renewals, and just ways that they can address those without appearing to the rest of the channel or other partners that they have all their eggs in one particular distributor or reseller's basket.

So this gives them an option, third party removed option to address those challenges.

[Greg Porter], Private Investor.

I have two questions.

Can you talk a little more about your margins, both your gross margins as well as your operating margins?

Is there a level at which you think is a normalized range?

And do you have longer-term expectations of where you think the Company should be?

Okay, so great question.

In terms of the operating objections of our Company, we would like to -- as we continue to grow on our path to become the most trusted and respected IT provider in our industry, the goals that we've set for ourselves is like -- when we do we become a $1 billion company?

And that's what we're going towards.

Now, in terms of gross margin as a percentage or net income as percentages, our objective is to grow net income, ultimately net income, in real dollars.

Compare that to equity, and that's what we intend to grow.

We intend to grow our Company based on those objectives.

People here are not a -- there is no commission paid based on sales.

We pay commission based on commission, and we pay bonuses based on contribution margin.

And we pay bonuses to our management based on real gross margin income from operations.

So, having said that, those are our objectives.

The problem with budget is we have sales and commission plans that are based on gross margin dollars, most importantly.

There are limits in terms of what you can discount products at.

There is strict control when it comes to that.

But we have to remain flexible, and it would be wrong -- we would deem that wrong if you create a budget for next year and you set certain targets you cannot discount below a certain point.

If your competitors then discount below that point, we would be unable to respond and we would basically lose that line.

We've tried that approach early on, I would say 5-6 years ago.

It wasn't so successful.

So right now, we are in an environment of extreme anxiety in terms of the economy, overall economy.

Our publishers as well as our customers are -- it's an anxious environment in terms of the overall economy.

Having that said, looking at our growth in revenue, we definitely provide the services that they want us to provide.

However, our competition comes in and discounts the two prices that are far lower than what we typically price it at.

We only have two choices to make.

We are either in this business or we are out of that business.

We agree to be in this business, and economics -- we see economics above accounting.

The current quarter might be impacted.

The current year might be impacted.

However, that is comparing ourselves to an extraordinary year last year.

Our Q3 results this year are the best they have been in the last five years, except comparing them to Q3 of last year.

As we said in our first-quarter press release, we warn everybody -- we just want to make sure the investors are aware, as we are aware, that probably with the level of growth our software's publishers expect and probably with our competition being where they are and being faced with tremendous price pressure, we wanted to make sure that we informed investors in Q1.

For the remainder of the year, the income might be impacted compared to an extraordinary year last year.

However, we are still extremely profitable and we continue to focus on that.

So we could let people go and we could manage the numbers for 2, 3 quarters, but what we plan to do here is to grow this Company, and that requires investments.

And that's, quite honestly, what we've done and we plan to continue to do because we believe in the long-term future of this Company.

Thank you, that's helpful.

My second question is, can you talk generally about your cash balances?

How much of the cash that's on your balance sheet do you feel you need to retain in order to run the business?

And how much of it is surplus?

So, with regards to the cash our balance sheet, we use that cash every now and then for our flexible payment option plans, which is we sell software to customers and they might want to pay that over two years.

It's a complete package, and they decide to pay us back over two years because their budget might be aligned to that.

We feel that's a very important competitive advantage for our TechXtend division.

Software publishers like that.

It's a quick approval.

There's not a lot of paperwork.

We really focus on A-plus-rated companies.

We want to make sure we don't run a lot of credit risk, and so far in the last eight years that we have had this program, there has not been any significant write-offs in terms of that debt.

We continue to focus on that and provide customers with that option.

In fact, it has grown significantly and it's one of the reasons that TechXtend division has performed so well in Q3.

The results are unbelievably good for TechXtend in Q3 of this year.

So it's something that we continue to provide.

We are looking, in terms of a facility.

If we could borrow funds at a very low rate from a bank based on our financials and we could actually finance deals at A-plus customers at higher interest rates, that is something that we are currently looking into.

If you look at our cash position, I would say right now there's a good -- $7 million to $8 million of that is available for these deals on a quarterly basis.

Thank you, I am showing no further questions at this time.

Thank you.

We appreciate your interest in our Company and we look forward to reporting our Q4 results in January of next year.

This concludes today's conference call.

You may disconnect at this time, and thank you for your participation.