Climb Global Solutions, Inc. (CLMB) Q3 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to 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, Melanie Caponigro. Ms. Caponigro, you may begin your conference at this time.

Thank you and good morning. Welcome to Wayside Technology’s third quarter 2013 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 call. We released earnings for the third quarter at approximately 5 PM Eastern Time, Thursday, October 24, 2013. 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 www.waysidetechnology.com/earnings-call. This conference and the associated webcast contain time-sensitive information that is accurate only as of today, October 25, 2013. A detailed discussion 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 Simon Nynens.

Thank you, Melanie and good morning to everybody. We are pleased to report solid quarterly results as compared to Q3 2012’s strong quarter. Our Lifeboat Distribution segment delivered solid results as it continued to execute on its strategic plan. Our TechXtend segment revenues were down compared to an exceptionally strong Q3 last year. Regarding our balance sheet and share price, if you add up our cash, marketable securities and long-term receivables, which is basically cash that we have invested in financing our customers and is earning interest, you arrive at a balance of $22.8 million, which is about around 70% of our equity. Looking at our market cap close of business yesterday, this would amount to 35% of our market cap. So if you deduct the cash, marketable securities and long-term receivables from our market cap, you end up with a market cap of around $41.5 million and that for a company that generated income from operations of $8.5 million in 2012 and paid out dividends of $0.64. Due to these large cash balances in profitable results, we have returned over $27 million in dividends in the last 10 years. We value our shareholders as we continue to build our company we feel it’s fair to distribute some of our earnings to our shareholders. And I am therefore glad to report then on October 23, the Board of Directors declared a quarterly dividend of $0.17 per share of its common stock payable November 15, 2013 to shareholders of record on November 5, 2013. This represents a $0.01 per share increase in the dividend as compared to Q2, 2013 and prior. We provide easy access to the right IT products. We have the tools in place to add more publishers including a great team and a great IT infrastructure. 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 2013 results reflect positive year-over-year growth across all cylinders of our business. The key factors in Lifeboat’s Q3 performance, with the successful penetration and expansion of pivotal software lines, within a variety of Lifeboat’s premier reseller accounts, the large account resellers and DMRs, the direct market resellers, along with the successful expansion of our business within targeted solution provider accounts, including VARs, the value-added resellers; SIs, the systems integrators and other consultancy type companies. Lifeboat signed five new distribution agreements in Q3, 2013. These new agreements will strengthen Lifeboat’s portfolio and enhance our focus on our grow to market concentration areas including virtualization, security, application and life cycle management, data base infrastructure, application and network infrastructure, and business productivity. Thanks Simon.

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

Thank you, Simon. Although we saw a decrease in revenue and margin for the quarter due primarily to a decrease and extended payment terms transactions, our customers continue to look to TechXtend as a trusted advisor in the areas of virtualization cloud, storage and infrastructure management and business intelligence and information management. Our focus on the providing easy access to the right IT products remains our number one priority. And this is evident in the changes that we have made to the TechXtend website where we have made it easier for our corporate customers to procure via a personalized extra net. Additionally, we held our fall customer event in September where we bring in our corporate customers and partners together for a day of knowledge transfer and business discussion. This event gives us the opportunity to work with existing customers as well as identifying new customers and help them find areas of technology that can help to meet demands of business challenges they face. Once again I would like to thank our back office and support teams for their efforts in the quarter.

Thank you, Shawn. Tom Flaherty, our CFO will now report on the financial numbers. Tom?

Thank you, Simon and good morning to investors, analysts, employees and friends. I will discuss our third quarter financial results both on a consolidated basis as well as by business segment. Net sales for the third quarter of 2013 were $70.5million. This is compared to $75.5 million in Q3 last year representing a 7% decrease on a consolidated basis. Sales for our Lifeboat distribution segment were $56.9 million and represent 81% of our total revenues during Q3. Lifeboat sales reflect a 2% increase compared to Q3 last year. The increase as Dan mentioned in sales in the Lifeboat segment was mainly a result of the strengthening of our account penetrations. Sales for our TechXtend segment were $13.6 million compared to $19.5 million in Q3 last year and represents a 30% decrease. The decrease in sales in the TechXtend segment was primarily due to a decrease in large single sales transactions and a decrease in extended payment term sales transactions as compared to exceptionally strong levels in the prior quarter. On a consolidated basis, our gross profit was $5.3 million compared to $5.7 million for third quarter of 2012, representing 8% decrease. Our gross profit for the third quarter – I am sorry our gross profit margin for the third quarter of 2013 was 7.5%, the same as the last year. Lifeboat distribution’s gross profit for the third quarter was $3.8 million. This compared to $3.7 million in Q3 last year represents a 4% increase. This increase was primarily due to higher sales volume in the current year. Our TechXtend segment’s gross profit was $1.4 million and decreased by 29% as compared to last year. The decrease in gross profit was primarily due to decreased sales volume including a decrease in large single sales transactions and a decrease in extended payment term sales transactions. Vendor rebates and discounts for the quarter ended September 30, 2013 amounted to $300,000 or 0.4% of net sales compared to $400,000 or 0.5% of net sales for the third quarter of 2012. The company monitors gross profits and gross profit margins carefully. Price competition in our market persisted in the third quarter of 2013 and we anticipate that margins as well as discounts and rebates will continued to be affected by this current trend. Total selling, general and administrative expenses were $3.5 million compared to the $3.6 million in Q3 last year. This decrease is primarily the result of a decrease in commissions and bonus for our TechXtend segment, which are based on gross profit and segment income. Our net income for the third quarter of 2013 was $1.3 million compared to $1.4 million in the prior year. Q3’s income tax rate was lower primarily due to a change in the state of New Jersey’s apportionment rules which lowered our state tax rate as compared to the prior year. Our earnings per share on a fully diluted basis was $0.29 per share, the same as last year. Moving on to the balance sheet compared to our balance sheet at December 31 the following key accounts had fluctuations. Cash from marketable securities was healthy $14.7 million at September 30 compared to $14.2 million at December 31. This increase is comprised primarily of $4.3 million of positive cash flow from operations offset by dividend payments of $2.2 million and $1.8 million of repurchases of our stock. Account receivable, current and long term, decreased by 21%. This is primarily due to a lower level of sales volume in Q3 as compared to Q4, 2012. That should be noted that Q4 is typically our strongest sales quarter of the year. Accounts payable and accrued expenses decreased by 27% due to a decrease in purchases to support a lower sales volume in Q3 as compared to Q4 2012. The company has no other debt. We do however have a $10 million revolving credit facility that can be used for working capital purposes, including financing of larger extended payment term sales transactions. As of September 30, we have no outstanding balances under the credit facility. Because we believe our stock price is undervalued during the quarter, we continued to repurchase approximately 47,000 shares of our common stock under our 10b5-1 stock purchase plan. We still have authorization to buyback approximately 206,000 shares. Our stockholder equity now stands at $33.1 million and cash makes up 45% of equity. Working capital at the end of the quarter amounted to $24.4 million. As Simon mentioned at our October 23 board meeting, the Board of Directors declared a $0.17 dividend per share for our common stock payable November 15 to shareholders of record on November 5. This represents a $0.01 per share increase in the dividend as compared to Q2 and prior. In conclusion, the company continues to have strong operating results, a strong balance sheet and is adequately capitalized to support our continued growth plans. I want to personally thank our team members worldwide and especially the staff in the finance and HR departments for their hard work and dedication. Simon, I turn it back to you.

Thank you, Tom. We thank our customers and we thank our vendors, the software publishers for their trust and partnership. We are a flexible, proactive and knowledgeable partner who acts like a tour expansion of a vendor sales and marketing team. Thank you. Operator, we can now start the Q&A session.

Thank you. (Operator Instructions) Our first question comes from the line of Chris Parker, a Private Investor.

Thank you very much. I just had a little question about well, first thank you for another good quarter of excellent results and thanks very much to the Board of Directors for increasing the dividend.

Thank you, sir.

Yes, the second is the question about the tax rate, I noticed unfortunately just after the last conference call that the main reason for the earnings increasing in the last quarter was a lower tax rate. And I noticed that in this quarter if the tax rate had been consistent with what had been over the last six [ph] earnings would actually have been down about $0.04 to $0.25 on a diluted basis. So I am wondering if the roughly 30% or 33% tax rate that we have had for the last two quarters versus the 39% or 40% tax rate that we have historically had for the last six years is the lower tax rate sustainable or is it some…

Yes, good questions Chris. Part of that reduction in our tax rate was due to a prior year’s over accrual of the tax rate, which is being bled into our P&L during 2013. And also included in the Q3 tax expense is a reduction due to a true up to our income tax returns our company files on extension and our returns were filed in September. So during the quarter, we performed a final reconciliation to the tax returns to our tax accruals. So there was an additional pickup for reduction of tax expense in Q3. But going forward, we have taken all over accruals and the lower tax rates will continue to be in effect.

Thank you. (Operator Instructions) Our next question comes from the line of Steve Emerson from Emerson Investment Group.

Congratulations on your management team and your results.

Thank you, Steve.

Please discuss your growth initiatives, you have emphasized in other calls building up of Latin American and European sales teams and I am curious what percent of revenues this is now up to and what your expectations are? And perhaps address how you see us growing both in gross margin dollars and other initiatives?

Okay. Let me answer the question first in terms of international sales. International sales as a percentage of overall revenue amounted to 14% in the third quarter of 2013 and it was 15% in the third quarter of 2012. Looking at Europe and Latin America, Latin America having first two great quarters is off to – was little less growth in Q3 as well as Europe. We continue to expand in those markets. We think we have market share to gain. Most importantly, what we try to do is convince our vendors that we currently authorized to sell their products in the U.S. to also start expanding those products on a worldwide basis. And I think that’s something that we look towards as a growth area. So we don’t want to – and again the results are important as we have seen the dividend is important, but growth is also important, but we don’t want to overextend our investments without the agreements being signed up. So in terms of the growth initiatives in the U.S., you look at our competition, Avnet just reported minus 1% in North America, you look at Ingram Micro slightly below 2%, where our 2% of gross margin increased by 4%, but their gross margin percentage was also better. What we are looking forward is towards the software publishers continued investment in signing the software publishers up. That’s the way to our growth. We are looking towards acquisitions. But as I said in previous calls as well, a) there are not that many value-added distributors out there in the U.S. or in Europe and b) we firmly believe that the best way to grow those companies as we have in the last couple of years, we believe that we have to sign up software publishers and that will be the way to our growth. Now, with regards to TechXtend, we have some large deals in Q3 of last year. We had some large deals in Q4 of last year. And as we have said in the previous calls, those will basically allow us to aid Lifeboat, we expect to do good compared to last year, but TechXtend was going to face off comparisons and I think that will also go for Q4. Having that said if you look at the underlying revenue of TechXtend, most sales representatives are up, the repeat orders for customers are up. And we are really moving towards that value-added reseller that we have been building over the last couple of years. Unfortunately, just a couple of larger deals did not come through. What we are also seeing in the current environment is a headwind in terms of these deals coming through. There is – the decision process seems to be somewhat slower than it used to be. And it’s dragging on the results of not only us, but a lot of software publishers direct sales as well. So having that said, if you look at our results this year, last year, 2011 return on equity very strong results, very conservatively a balance sheet. We continue to look forward actually with great confidence. And I think that was reflected as well on our increase in dividend. So I hope that answers your question and thank you for the praise, Steve.

Thank you. And our next question comes from the line of (Duff Kagan from Milwaukee Private).

Good morning. Thanks for taking my call.

You are welcome, thank you.

I have a few questions. And the first one I’d roll into two parts. Number one, can you talk about the change in your relationship with Dell subsequent to their privatization? And second part of one is how does Wayside remain relevant in a world that’s moving to the cloud?

Okay. So to answer your first question, in terms of Dell, what we have seen is some change in the financial services of Dell while they were going private and going through those battles. What we have seen is it was more or less a direct of internally to use the financial services side of Dell. And we have seen declining FBO sales as a result of that and mostly in Q1and Q2. If you look at Q3, again our process for these larger finance deals which are basically deals you buy now and you pay us back in the next two years. These deals our customer service is outstanding there and our decision process is actually quite fast. And we have actually seen that part of the business come back. On the Lifeboat side in terms of Dell, we continue to grow with Dell. We continued to remain excited about the growth prospects within Dell. And we don’t know what the future holds, but so far we are in close contact with Dell’s management and we remain excited about the partnership. Your other questions was the cloud, so we were actually, we just has authorized in the second quarter of this year to be so fast as anti-fire [ph] security company to be their first authorized software-as-a-service distributor. And we actually look towards the cloud and towards the software-as-a-service model as a way for us to define our value and show our strength within the distribution channel, because it does not change that people will have to require software and they have to know to what the new functionalities are of that software. And how they are basically accessing that software whether that is on the cloud via a line to the internet or not, the procurement systems stay in place to keep their purchasers. It’s mostly a financial change. Our systems are ready for it and we are working hand in hand with software publishers to actually guide them towards the cloud. And Dan, if you want to expand on that?

I was just going to augment that Simon by saying that we don’t – where our role is as a trusted advisor we see that transforming into the cloud. One other things that values we add with our vendor partnerships is that we introduced the right resellers into the mix, that will continue. We feel as a relationship driven company that the cloud represents extraordinary opportunity for us because it really matches well with our value proposition.

Thank you. (Operator Instructions) And thank you. At this time there no further questions. Please continue with any closing remarks.

Thank you. We appreciate everybody’s support for our company, our interest in our company and we look forward to reporting on our fourth quarter results in January 2014. Thank you.

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