Good morning, ladies and gentlemen, and welcome to the Wayside Technology Group Conference Call. At this time all participants are in the listen-only mode. Later, we will conduct the 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 fourth quarter 2018 earnings call. Before turning the call over to Steve DeWindt, the company's President and CEO, I'll dispense with the customary cautionary language and comment about webcast for this earnings call. We released earnings for the fourth quarter at approximately 5:00 p.m. Eastern time, Monday, February 25, 2019. 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. I would like to remind you that certain comments made in this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in our Forms 10-Q and 10-K filed with the SEC. Wayside Technology Group sees no obligation to update and does not intend to update any forward-looking statements. Our presentation also includes certain non-GAAP financial measures including adjusted gross billings, non-GAAP net income and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in according with SEC rules. You'll find reconciliation charts in the earnings release and Form 8-K we furnished to the SEC. Now, I would like to turn the call over to Steve DeWindt.

Thanks, Melanie, and good morning everyone. Thank you for joining us today to discuss our fourth quarter and year-end 2018 operating results. This quarter and year had mixed results reflecting that this year was one of transition for the company. On the positive side, our sales and operational teams worked hard to deliver quarterly net revenue growth of 10% year-over-year and annual net revenue growth of 13% year-over-year. We also closed the year with overall adjusted gross billings on a non-GAAP basis of greater than $509 million, the first time that the company has cracked the half billion dollar mark. On the negative side, our gross margins in Q4 were squeezed due to competitive pressure and our product mix coming down to 14.7% compared to 16.9% last year with gross profit dollars for the year decreasing by 1% year-over-year. As we've mentioned before, our operating expenses increased due to our investing in business development and field sales personnel. Our net income for the year was down 30% due to the declining margin investment in additional personnel and separation expenses. However, net income for the fourth quarter was up by 54% year-over-year due to factors that include a lower federal tax rate. Waysides position in the marketplace has always focused on introducing new emerging vendors and technology into the IT sales channel. As you may have seen in recent press releases, we are continuing to do so having signed several new exciting emerging technology vendors throughout this year. With our many years of experience, we leverage our technical – technological expertise, our logistical support and our financial tools to assist these newer vendors in building out their national sales channel. In Q1, we began to invest in business development personnel as well as a regional field sales team. The business development…

Thanks, Steve. I'll review our financial results for the fourth quarter then discuss our balance sheet and liquidity. Overall, net sales for the quarter increased 10% to $49.1 million compared to $44.4 million for the fourth quarter last year. Lifeboat Distribution net sales were up 17% for the quarter to $44.3 million while TechXtend net sales for the quarter were down 27% to $4.8 million. As we have discussed in the past, our TechXtend business, which accounts for about 10% of sales tends to fluctuate from quarter-to-quarter based on the timing of deal flow, but does provide incremental cash flow by leveraging our existing infrastructure. The growth in lifeboat is more consistent and reflects some initial traction of the expansion of our vendor recruitment and field sales organizations. These expansion efforts began in January 2018 and added approximately $2 million in incremental expenses on an annualized basis. While this investment was a drag on earnings in 2018 as the teams build their pipelines, we feel it as a critical investment to increase our market share and gross profit on a going forward basis. Overall, adjusted gross billings on a non-GAAP basis increased 6% to $134.3 million from $127 million in the prior year. As discussed in prior calls, 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. Gross profit for the quarter decreased to $7.2 million compared to $7.5 million for the same period last year, reflecting the lower sales at TechXtend. Distribution gross profit for the quarter remains consistent with fourth quarter last year at $6.3 million,…

Thanks Mike. I'm very pleased overall with our team's efforts in moving forward with a focused strategy and energetic pursuit of our goals. These efforts are paying off. And with that operator, let's open it up for questions.

Thank you. [Operator Instructions] And our first question comes from the line of [indiscernible]. Your line is now open.

Hi, good morning. First of all, great, great quarter. I believe speaking soft has made the stock fairly undervalued, especially given the yield. But my question is do you foresee any growth coming on an inorganic basis? Are there companies out there and I realize your market cap is fairly small, but are there companies out there that you could be acquiring or looking to acquire as part of your growth?

So, let me start with this one. One of my favorite topics, inorganic growth, since throughout my career at various companies, this has been something that I have focused on. If you look at other players in this industry, wholesale distribution within the IT channel has always had a mixture of both organic growth and inorganic activity. And it is definitely something we are looking at. But frankly since I got here, the main focus has been on organic growth structuring to make sure that we are focused in the right areas making sure that internally we're doing the right things and we thought the first thing we needed to do was strengthen our vendor lineup and we needed to do that by adding business development resources. We also then needed to focus on shoring up and tightening relationships with some of the larger resellers in the channel. And we have done that with the focus on hiring and getting out there a new field sales team. And now that we've done those two things, we are beginning to look to see what kind of opportunities exists out there. And I will tell you there are plenty of opportunities. We just need to make sure that they're the right ones. Mike, do you want to add anything to that?

No, I think it's well said. Are – if you want to call it our capital allocation strategy is to – we pay dividend and then with excess capital, our first choice would be to find accretive investments to make in our business or adjacent businesses to build the market cap of our company. And then should there be none of the available – the board would evaluate whether we need to return additional capital in the form of buybacks to shareholders, which we have done in the past. But, certainly our strategy is to reinvest in either our business organically or through M&A., if we find accretive opportunities to do so.

Thank you. [Operator Instructions] And our next question comes from the line of [indiscernible]. Your line is now open.

Hi, guys. Nice, nice – so far nice quarter and I see you're starting to put your own stamp on the business. So I have a couple of questions, I'll sort of put it as one question. How consistent do you think the growth of revenue now that you have established that will continue?

Thanks Peter. Consistency in revenue growth, I think that's always a tad – I won't say easier, but it's more forecastable than is the margins. I would say that within this industry, there's no question that there are product areas that are hot and we just need to make sure that we continue to nurture new vendors in these growth areas. So for the past couple of years, the biggest single area of growth has been in the security arena and we have done quite well there. There are other areas that we need to be focusing on. And that's the reason Peter that we've invested in a number of people focused on new business development because they are spending their entire time, finding out, searching, qualifying and wooing these new vendors who are bringing new technologies to the fore. And, we've been, I think, blessed by being able to find people that have done quite well and have written the newer technology popularity into a very strong success and have pulled us along with it. I'm feeling very confident about our ability to continue to find these new vendors to create alliances with them and then to go out and sort of benefit from the growth that they are seeing that will be passed along to us as well. The other area that frankly we've done quite well in is creating alliances with very strong resellers. If you look at the mix of who we sell our products to, that has shifted a bit in the last 12 months, in that we've done quite well in identifying some of the stronger resellers out there and then being their go-to channel for providing new technologies.

Thank you.

Mike, do you want to add anything?

Yeah, so Peter as you know TechXtend is more of a transactional business that goes up and down from quarter-to-quarter. You haven't bought much in that a while. And Lifeboat is much more consistent. I think your question was about consistency. The other thing that we keep in mind when we look at it is we're in a large market with a small market share and the market is growing. So the market we don't think is contracting. So the question is the historical growth for – there's always been historical top-line growth for Lifeboat, whether the opportunities for it to continue. And we look at the fact that we're in a very large market with a small market share, new vendors coming into the market all the time and we compete with the biggest guys in the market and have shown the ability to win some of the vendors that we announced over the last quarter, Micro Focus and Imperva, the other choices for those vendors are, you know, the real big players in the industry. And we're able to go up against those companies and win business. So in terms of the potential for continued consistent growth at Lifeboat, I think we think all of the necessary factors are there.

Thank you. And our next question is a follow up question from the line of [Operator Instructions]. Your line is now open.

Yeah, you've had great results. You obviously are very well spoken. What are your plans for investor relations for the balance of this year? I know I saw you last year at a couple of conferences. What are your plans this year?

Yeah, so as you noticed, we were out in a couple of conferences last year. I think we'll continue to create market awareness through conferences. We always have follow-ups after the conferences. And then we'll try and create additional kind of awareness in the analyst community to try and get coverage that way. So I don't think there'll be anything outside the ordinary of what we do in terms of investor relations, but we do intend to make ourselves more visible. And for us, outbound awareness is a big step because our story to a certain extent tells itself, certainly from the standpoint that we're a company technology that's been around for a while consistently profitable, no strong balance sheet. So, you know, just telling that simple part of the story and creating awareness is step one for us. And then as we're able to kind of develop and get a track record with our strategy, if you work beyond that and hopefully pick up some third party analyst coverage to support us. So that's our – that's our, our plan and our hope. Of course, it takes a little bit of time to get all the wheels moving effectively on that.

Great. And we expect on average to be presenting at a conference about once a quarter at a minimum.

You keep putting up good numbers and you'll get attention obviously and we will make it a lot easier to tell the story.

Great. Thanks, Anthony.

Thank you. [Operator Instructions] And our next question is a follow-up question from the line of [indiscernible]. Your line is now open.

So this is sort of – one, I think it would be good idea to make your income statement a little more less convoluted with all the charges and credits. And as a follow up, what was the ultimate net-net charges and what are the costs, the separation agreement. How much did that impact the income statement? And is that a one-time thing that is now finished going forward?

Yeah, hey, Peter. It's the – as I said we'll do our best not to have anymore separation expenses. But the charge at the operating income level was $2.4 million and at the net income level it's $2 million, okay, and then was $0.45 on the EPS and the net EPS impact was $0.45. So $0.45 EPS, $2 million net income, $2.4 million pretax income if you want to look at it that way.

And then one-time are ongoing.

It's all one time. So all the charges are proved for this year for that event.

Thank you. At this time that are no further questions, please continue with any further remarks.

Well, given, we sure appreciate all the support that we've been given by our shareholders. I must say it is fascinating to me to see the interest that people have in our stock in the company itself and the loyalty that people have. Holy smokes, we've got a lot of stockholders that have been shareholders for a long time. We've been very pleased with the reaction in the last two days. I'm looking right now. It's currently trading at $12.38, so thank you all. And Mike, do you have anything further, I don't.

No, sir.

Okay then thank you very much and we look forward to talking to you next quarter.

Ladies and gentlemen, this concludes today's conference call. You may disconnect at this time and thank you for your participation.