Climb Global Solutions Inc (CLMB) 2018 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, Melanie Caponigro.

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

Thank you, and good morning.

Welcome to Wayside Technology's Second Quarter 2018 Earnings Call.

Before turning the call over to Steve DeWindt, the company's Interim President and CEO, I'll dispense with the customary, cautionary language and comment about the webcast for this earnings call.

We released earnings for the second quarter at approximately 5 p.m.

Eastern time, Monday, August 6, 2018.

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 a rebroadcast will be available at waysidetechnology.com/site/content/webcast.

This conference call and the associated webcast contains time sensitive information that is accurate only as of today, August 7, 2018.

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

Wayside Technology Group Inc.

sees no obligation to update and does not intend to update any forward-looking statements.

Now I would like to turn the call over to Steve DeWindt.

Thanks, Melanie.

Hello, everyone.

Thank you for joining us today to discuss our second quarter 2018 operating results.

This quarter had mixed results.

On the plus side, our sales and operational teams worked hard to deliver revenue growth of 13% year-over-year.

On the negative side, our gross margins were squeezed due to competitive pressure and product mix, coming down to 14.8% compared to 16.8% last year.

In addition, our operating expenses increased due to separation expenses associated with the departure of our former Chairman and CEO.

This led us to showing a loss for the quarter.

However, on an adjusted basis, our net income for the quarter, was $0.9 million after excluding the $2 million impact of the executive separation expenses.

Wayside's position in the marketplace has always focused on introducing new vendors and technologies into the IT sales channel.

As you may have seen in recent press releases, we are continuing to do so, having signed several new, intriguing, emerging technology vendors this year.

Our product lines include security, hyper converged, storage, data management and networking products.

In Q1, we also began to invest in a regional field sales team with business development for the enterprise marketplace to expand and solidify our reseller network with new products and high-touch sale support.

We're encouraged by the enthusiasm our reseller partners have shown in our initiative, as we make investments now to position ourselves for the future.

We recently hosted an advisory council of our largest reseller and vendor partners and found that the overall relationships and opportunities are growing stronger.

We continue to have a strong balance sheet and have not needed to take on debt.

The company historically returned some of the cash to investors as a dividend with a yield of about 5%, and we have declared a dividend of $0.17 this quarter.

Our stock buyback plan is still in place and as has been the case in the past, the board will make decisions regarding stock purchases on a quarterly basis, based on current business needs, objectives and market conditions.

This past quarter has shown that demand for IT solutions delivered through a reseller channel remains robust, with opportunity for shared gains and growth in security, hyper converged, storage, data management and networking products.

As we continue to add to our product portfolio, execute well with our sales teams, expand our customer base and focus on controlling costs and improving our IT delivery and reporting systems, we're feeling very good about the outlook for the rest of the year.

We look forward to updating you about these focus areas on future calls.

Let me now hand off to Mike Vesey, our Chief Financial Officer.

Thanks, Steve.

I'll review our financial results for the second quarter, and then discuss our balance sheet and liquidity.

To start, you'll note that we reported a net loss for the quarter of $1.1 million or $0.25 per share, resulting from $2 million of separation expenses, net of taxes that were recorded upon the departure of our former Chairman and CEO.

The net expenses consisted of $1.7 million of accelerated investing of restricted stock, approximately $800,000 of cash payments and reflect an income tax benefit of $400,000.

To provide better comparability, we reported non-GAAP earnings, so without the impact of the separation expenses, we reported non-GAAP net income of $900,000 and non-GAAP diluted earnings per share of $0.20 per share compared to net income of $1.3 million last year and diluted earnings per share of $0.28 for the same quarter last year.

I'd also like to remind you that we adopted the new accounting standard ASC 606 revenue from contracts with customers, effective January 1, 2018.

The adoption had no impact on gross profit or operating income, but resulted in a significant portion of our revenue being reported net of cost of sales and increased our gross profit margin percentages.

We present prior year results on a restated basis and provide reconciliations of our net sales to our adjusted gross billings as a non-GAAP measure in our earnings release and 10-Q filing to assist with comparability with our historical results.

Overall, net sales for the quarter increased 13% to $43.9 million compared to $38.1 million for the same quarter last year.

Lifeboat Distribution net sales were up 8% for the quarter, to $38.3 million, while TechXtend net sales for the quarter, were up 52% to $5.6 million.

As we have discussed in the past, our Lifeboat segment accounts for about 90% of our net sales and has shown consistent top line growth over the past several years, while TechXtend sales tend to fluctuate from quarter-to-quarter, based on the timing of deal flow.

This period, we benefited from a strong quarter from our TechXtend business when compared to the prior year's quarter, due to several, large enterprise software sales.

Gross profit for the quarter, decreased slightly to $6.5 million compared to $6.6 million for the same period last year.

Lifeboat Distribution gross profit for the quarter, decreased 6% to $5.3 million, while TechXtend increased 27% or $300,000 due to the increased sales we previously discussed.

At Lifeboat, we experienced some turnover in our vendor accounts, and while we more than offset the loss of revenue with sales of our existing product lines, the gross margins on those products were somewhat lower than the ones they replaced.

And the product mix between software, hardware and maintenance services was different, impacting our GAAP gross margin percentages.

Gross profit margin, as a percentage of net sales, decreased by 200 basis points to 14.8% compared to 16.8% in the second quarter last year.

The change in gross profit margin was primarily due to a shift in product mix compared to the same quarter last year.

Under ASC 606, our gross margin as a percentage of net sales is a composite of items that are recorded net of the related cost of sales or 100% gross margin and items that are recorded on a gross basis, typically reflecting a high single-digit profit margin.

The weighting of the 2 product categories in the composite margin is based on a relative percentage of GAAP revenue.

During the second quarter of 2018, approximately 8.7% of our net revenues were from security maintenance and other products, which we recorded on a net basis or effectively 100% gross margin.

And 91.3% were products that were reported on a gross basis.

For the same quarter in 2017, 10.5% of our net sales were for products recorded on a net basis and 89.5% for products recorded on a gross basis.

This change in mix accounted for approximately 160 of the 200 basis point decline in gross profit as a percentage of net sales quarter-over-quarter.

The remainder of the change was due to a decline in gross margins as a percent of net sales for hardware and software products, which we recorded on a gross basis.

The decline in those products was -- the margin for those products was 6.7% in the current year's quarter compared to 7.1% in the prior year quarter.

The decrease in the gross profit margin on the hardware and software products was due to the growth in higher-volume product lines, which do carry a lower-incremental margin than our overall average for the category.

We reported adjusted gross billings and gross margin as a percentage of adjusted gross billings as a supplemental non-GAAP information in our earnings release and our soon-to-be-filed 10-Q to assist any analysis of our gross margin.

Total selling and general administrative expenses for the quarter increased by $500,000 to $5.3 million compared to $4.8 million for the same quarter in 2017, due to higher personnel costs resulting from the investment in our business development and field sales organization, and higher legal, accounting and public costs.

During the first quarter of 2018, we hired 2 executives and 5 senior field sales personnel to enhance our outreach to new vendor prospects and expand our field sales capabilities.

This investment is expected to our -- add to our operating expenses in the short run, but provide a future payback as we recruit new vendors and expand our reseller base into new market segments.

We also incurred additional legal and accounting fees due to the implementation of the new revenue standard, corporate changes and public company compliance.

SG&A expenses, as a percentage of net sales, was 12.1% in 2018 compared to 12.4% in the prior year.

For the second quarter of 2018, the company recorded a provision for income taxes of $100,000 compared to $600,000 in the prior year.

The company's income taxes for the 3 months ended June 30, 2018, was impacted by limitations on the deductibility of separation expenses resulting from section 162M of the Internal Revenue Code and $200,000 in adjustments to the accrual for state income taxes in states which have recently enacted economic nexus statutes.

The company recorded a $400,000 tax benefit related to the separation expenses during the 3 months of June 30, 2018, which was accounted for as a discrete item or an 18% effective tax benefit rate.

The company's effective tax rate on ordinary income, before the separation expenses, was 24.1% for the 3 months ended June 20, 2018 compared to 32% for the same period in 2017.

As previously mentioned, the company incurred a GAAP net loss of $1.1 million for the quarter ended June 30, 2018, compared to net income of $1.3 million during the prior year.

However, the net loss was primarily attributable to the $2 million of separation expenses, due to the departure of our former Chairman and Chief Executive Officer.

Non-GAAP net income, excluding the impact of separation expenses, was $900,000 compared to the $1.3 million in the prior year.

GAAP diluted net loss per share for the quarter ended June 30, '18, was $0.25 compared to diluted income per share of $0.28 in the same period in 2017.

Non-GAAP diluted earnings per share, excluding the impact of separation expenses net of taxes, was $0.20 per share.

Moving on to our balance sheet.

We continue to manage a strong balance sheet and liquidity position with cash and cash equivalents of $10.4 million at the end of the period compared to $5.5 million at the end of 2017.

The increase was due to the positive impacts to operating cash flow resulting from the utilization of vendor prepayments made last year and reduced long-term receivables from extended payment sales.

In addition, we have no outstanding borrowings under our $20 million credit facility.

We paid approximately $800,000 in dividends during the quarter.

And as of June 30, 2018, stockholders equity stood at $38.9 million compared to $38.7 million at the end of last year.

Total working capital, including cash, was $32.1 million compared to $29.5 million at the end of last year.

In addition, our long-term receivable balances of approximately $5.3 million, which are not included in working capital, are available to us as sources of future liquidity.

On August 1, 2018, the Board of Directors declared a quarterly dividend of $0.17 per share of its common stock payable August 22, 2018, to shareholders of record on August 8, 2018.

So in summary, we showed strong top line growth this quarter.

However, our gross margin contribution was slightly down, and we experienced higher operating expenses, some due to investment in our business development and field sales organization and some due to higher legal and accounting expenses resulting from corporate changes, adoption of new accounting standard and other public company compliance costs.

Steve?

So that concludes our remarks for today.

Operator, we'd now be happy to take any questions.

(Operator Instructions) Our first question comes from the line of Peter Delgado.

Peter Delgado from Global Value Research Company.

It was really great to see the top line growth this quarter.

But specifically, I was -- been very intrigued with your recent news flow about signing of some new partners on the vendor side.

You guys see continued strength in this area?

Absolutely.

Peter, thanks for your question.

One of the things -- as I mentioned, one of the areas that we really focus on is introducing and -- finding, introducing, and then focusing on new and interesting, emerging technologies.

And so, we have a group of people that focus exclusively on talking with venture capitalists, talking with resellers and talking with large corporate users about technology that they see coming up that appears to be very useful.

We then go out and spend time talking to these new vendors, finding out what there go-to-market strategy is and assuming that they have a play for looking at resellers, we focus on trying to sign these people and helping to introduce them.

That's been one of the strengths of Wayside over the past 30 years of our life, finding new, interesting technologies and bringing them to the fore within the reseller channel.

And we fully expect that to continue to play an important role for us.

Our next question comes from the line of [Peter Lux].

So I had 2 questions.

1 question, but, sort of, 2 parts.

And I -- we've had a sort of this as a discussion, but I'm going to ask you a question again.

Steve, you still have the name -- interim about your name, are you guys still looking for a new CEO?

Or are you going to eventually remove that moniker?

Secondly, we've talked about, how do we bring this company to the forefront of investors, as it has languished, sort of, in the darkness with a very good record that no one seems to care about.

And I was wondering what your plan is.

Peter, thanks for your question.

Regarding the first part with interim, the board is going through a process of looking at exactly what the role requires and what it needs.

And beyond that, I'm really not at liberty to, sort of, discuss where things stand, which probably isn't very satisfying for you, but you continue to ask that question, feel free.

Next, in terms of going out and talking to investors.

Peter, we've taken this to heart, and Mike and I are regularly speaking with both, analysts and potential investors, and we are also looking at -- are there various conferences that where we can present our story and just make sure that Wayside is better known to people.

And we will be attending one in San Francisco in September.

I'd be happy to give you more information on that if you're truly interested, but please know that we've taken this to heart and are going -- and beginning to reach out more.

Just as a follow up, when you speak to potential investors, what's the feedback from them?

Overall, I would say people are pleased.

They look at our longtime history.

The fact that we've been sort of a steady Eddie within the industry.

We continue to be profitable, continue to generate cash, and continue to provide dividends that give people, at least in the area of 5% return, all of that seems to resonate for investors in small-cap companies.

Thank you.

At this time, there are no further questions.

Please continue with any closing remarks.

Really, I just want to thank everybody.

We appreciate your interest in our company, and we look forward to updating you again in the future.

Thanks very much.

This concludes today's conference call.

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