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Edited Transcript of WSTG earnings conference call or presentation 28-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Wayside Technology Group Inc Earnings Call

SHREWSBURY May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Wayside Technology Group Inc earnings conference call or presentation Friday, April 28, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Melanie Caponigro

* Michael Vesey

Wayside Technology Group, Inc. - CFO and VP

* Simon F. Nynens

Wayside Technology Group, Inc. - Chairman, CEO and President

* William R. Botti

Wayside Technology Group, Inc. - EVP of Sales

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Conference Call Participants

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* Jeffrey Richart Geygan

Global Value Investment Corp - President, CEO, and Chief Compliance Officer

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Presentation

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Operator [1]

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Thank you, and good morning. Welcome to Wayside Technology's First Quarter 2017 Earnings Call. Before turning the call over to Melanie Caponigro, the company's Chairman and CEO, I'll dispense with the customary and cautionary language and comment about the webcast for this earnings call.

We released earnings for fourth quarter at approximately 5 p.m. Eastern Time, Thursday, April 27, 2017. An 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/site/content/webcast.

This conference call and its associated webcast contains time-sensitive information that is accurate only as of today, April 28, 2017. A detailed discussion of risks and uncertainties are discussed in our Forms 10-Q and also in greater detail in our forms 10-K. Wayside Technology Group Incorporated seems -- 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 Melanie Caponigro. You may begin.

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Melanie Caponigro, [2]

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Thank you very much. I'm going to turn the call now over to Simon Nynens, the company's Chairman and CEO.

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [3]

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Thank you, Melanie, and good morning to everyone. We had an outstanding quarter. Gross profit increased 14%. Income from operations increased 20% and earnings per share, fully diluted, increased 36% to a first quarter record of $0.30 per share. Our Lifeboat Distribution division represented 86% of gross profit and 89% of segment income in the first quarter. Cash and long-term receivables for $22 million and represented a very healthy 60% of equity as of the end of March 2017.

Regarding cash flow and capital. We are fortunate to be able to continue to return capital to our shareholders. We believe that repurchasing our shares represents an attractive use of our capital, and this quarter, we bought back approximately 95,000 shares for a total of $1.7 million and paid out dividends, totaling $800,000.

Regarding the operational side of our business. Our new headquarters now represents the professionalism, passion and, most importantly, our culture. We also released a new corporate website at www.waysidetechnology.com. You can actually take a virtual tour of our new headquarters as well as get in-depth background about our culture and what we stand for in a fresh, modern, functional way. We also released a new TechXtend.com website as well as a major overhaul of our hosted web store for Intel software products.

In this quarter, we also received the SmartCEO Future 50 Award for our significant financial and employee growth and, most importantly, we, yet again, remained one of the best places to work by New Jersey Biz. We are dedicated to creating an engaging and welcoming environment for our employees. We believe it's essential to have a healthy work balance -- a healthy work-life balance, and that it's impossible to have both a successful career and personal life. Receiving this honor affirms the importance of putting people first and supporting a healthy and happy corporate culture.

We are excited about the prospects of more software publishers joining us. Customer and vendor feedback continue to confirm that we are on the right track. Our customer service is outstanding. We care and our customers notice. We look forward to growing our business.

Now, I would like to hand it over to Bill Botti, our Executive Vice President.

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William R. Botti, Wayside Technology Group, Inc. - EVP of Sales [4]

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Thank you, Simon. As Simon stated earlier, we had a very good quarter when compared with Q1 2016. In fact, at $112.8 million in revenue, it was nearly as strong as the $120 million we did in Q4 of 2016.

In Q1 2017, we grew revenue in all geographies and business units and did the same in gross profits dollars in most of them. Net sales increased 21% to $112.8 million. Lifeboat Distribution's net sales increased 21% to $104.5 million, and TechXtend's net sales increased 19% to $8.3 million. Gross profit increased 14% to $6.8 million. Distribution gross profit increased 13% to $5.8 million, while TechXtend's gross profit increased 15% to $0.9 million.

Gross profit margin, which is gross profit margin as a percentage of net sales for the quarter, decreased by 0.4 percentage points to 6%. Lifeboat Distribution segment gross profit margin decreased 0.4% to 5.6%, and TechXtend segment gross profit margin decreased 0.5 percentage points to 11%.

We faced continued margin pressure from the very large distribution companies we compete with in the market. This is reflected in the 0.4 points to our gross profit margin. We've managed to overcome most of that with increased revenues in most of our vendors and customers. The Lifeboat and TechXtend business units under the leadership of Brian Gilbertson and Kevin Askew, respectively, are currently operating smoothly in building toward continuing growth this year, following a very good Q1.

We continue to be very excited about our future, as we manage our expenses and build our product portfolio to help achieve our growth targets.

Thank you. Simon, back to you.

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [5]

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Thank you, Bill. Michael Vesey will now report on the financial numbers. Mike?

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Michael Vesey, Wayside Technology Group, Inc. - CFO and VP [6]

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Thanks, Simon. I'll now review operating expenses and balance sheet highlights. Total SG&A expenses for the quarter increased $500,000 to $5 million, up from $4.5 million last year. The increase is mainly due to salary commissions and incentive payments to support our growth. Even though the overall spending levels are up, the increase in the lower rate in sales resulting in a decrease in SG&A expenses as a percent of net sales to 4.4% in 2017 compared to 4.8% same quarter last year.

As Bill noted, our net income for the first quarter increased 28% over the same period last year. In addition, we repurchased 95,000 shares of our common stock in the first quarter, which, in combination with the previously repurchased shares, resulted in a 5% decrease in weighted average shares outstanding on a diluted basis from the same quarter last year to 4,359,000 shares. As a result, the growth in EPS over the same quarter last year outpaced the net income growth by a full 8 percentage points. Earnings per share on a fully diluted basis was $0.30 for the first quarter of 2017, a 36% increase over the $0.22 per share from the same quarter last year.

Moving onto the balance sheet. Cash and cash equivalents was $11.1 million at the end of the quarter compared to $13.5 million at the end of 2016. Our cash balance reflects an increase investment in working capital and $2.5 million of cash utilized to pay dividends and repurchase our stock. The increase in working capital was mainly driven by higher receivables related to higher sales over the past 2 quarters and increased payment terms for one of our major reseller accounts.

While both our accounts payable and accounts receivable balances declined from seasonally high December levels, the longer payment terms on certain customer accounts resulted in an increase of approximately $1.6 million in working capital accounts and a corresponding decrease in cash.

During the quarter, we paid $800,000 in dividends and utilized $1.7 million of our cash balance to purchase the 95,000 shares of common stock. On March 31, 2017, we had no outstanding balances under our credit facility, stockholders' equity stood at $36.9 million compared to $37.6 million at the end of last year, and total working capital, including cash, was $23.3 million compared to $24 million at the end of last year.

On April 26, 2017, the Board of Directors declared a dividend of $0.17 per share payable on May 17 to shareholders of record on May 10. The company has now paid dividends consecutively for over 57 quarters.

In conclusion, we wrapped up the quarter with solid growth in sales and net income and EPS, returned significant value to our stockholders in the form of stock buybacks and dividends, while maintaining a debt-free balance sheet with adequate equity and working capital levels to support our growing business.

Simon, I turn it back to you.

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [7]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jeff Geygan of Global Value Investment.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [2]

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I've seen your websites. Excellent upgrade on those.

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [3]

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Thank you. Yes, they worked hard on at the teams and we're excited about that. A fresh new look helps.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [4]

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Yes, I agree. The virtual tour is a nice addition too.

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [5]

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Right, right. And especially, the vendors visit us, it's -- we have more vendors visiting us than customers and it really represents to them the kind of distributor that they want to see in terms of the new fresh culture and the way we work together. It's really what they would like to see.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [6]

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Fantastic. So can you talk a little bit about your vendor development and how that's progressing and the evidence that we have good new vendors in the pipeline?

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [7]

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Yes, so in terms of vendor development, I'll let Bill go first and I'll follow-up. Bill?

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William R. Botti, Wayside Technology Group, Inc. - EVP of Sales [8]

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Sure, thank you. That's an ongoing process. We are currently in discussions with several vendors. Of course, all of those dialogues are done under NDA, so I can't give you any specifics at this time. Some are (inaudible).

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [9]

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Bill?

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William R. Botti, Wayside Technology Group, Inc. - EVP of Sales [10]

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Yes, hello?

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [11]

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Jeff? Did you hear Bill?

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [12]

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No, regrettably he cut out. Is there a way that he…

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [13]

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Yes. Yes, I'm sorry, I'll take over. I'll take over. We have a bad connection, it seems to be, and I apologize for that. So as Bill said, with those vendors that we're currently in negotiations with, of course, under NDA, we cannot discuss those. There is a good pipeline. In terms of timing, if you look at the growth in the first quarter, that came from our current vendors. Definitely, also came from vendors that we signed up the last 2, 3 years. There continues to be a healthy interest in terms of the large distributors, the ownership model, Tech Data are buying Avnet and is involved in incorporating that into there, but Ingram Micro now in the Chinese hands. So in terms of our competition, there remains strong interest from vendors, medium sized as well as large sized, to work with us. So we continue to be excited about those prospects. And like we said, we're really keen on making sure that we can provide value to them and can hit the ground running. So that's our main objective.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [14]

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Great. Good color. With respect to use of cash, at one point, I believe you'd retained outside counsel to help you navigate the market, to see if there was any prospective intelligent acquisition. I thought that relationship may have ceased. But can you give us some sense of what the landscape looks like?

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [15]

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Yes, so we hired investment banker to -- really, on a 6-month basis, to really go out there aggressively and see if there are any acquisitions that, to your point, make sense and that we can incorporate. And the main thing we wanted to accomplish is, is 1 and 1 really 3? Can we really incorporate, get some synergies out of this and continue to grow. We haven't found that, nor did we -- yes, we wanted to see really what is out there, really an extensive surge of what is out there right now. We continue to look for acquisitions. In terms of our cash, we all agree, an acquisition would make the most sense. A risk-free acquisition would make the most sense. Unfortunately, they don't exist. You always take on some level of risk. So you try to stay as close to your current business as you can and the business that you understand. That's the point where we -- the acquisitions that we looked at in the last 6 months, and we really looked at a lot of them, possible acquisition targets, were a little further away from our core model. Looking at our internal growth, we decided that, at this moment, we're not going to explore those. But what we are going to do is we're going to continue to look for a possible acquisition model. While we are doing that, we look at a conservative use of our cash. We all agree that there is excess cash on our balance sheet. How much? That is something that, we, as management, in close cooperation with the board review on a quarterly basis and say "What is a reasonable level?" Because we are in a growing business, and we do need that cash to facilitate the growth. So what -- and then, so your second option would be buying back shares. Third option is to increase the dividend, or to at least keep the dividend very comfortable that we can keep the dividend. And the increase of dividend is something that we are discussing as the board as well. But as you've seen from our past of the 57 quarters, it was, Mike? A long, long time. We -- if we increase the dividend, we try to, at least, maintain that dividend. So we're conservative when it comes to increases in terms of dividend.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [16]

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I appreciate that. You touched a little bit on the share buyback, spent about $1.7 million, de facto we've made a decision to buy a company that we know very well, which is our own. So can you talk a little bit about how you view the value of our stock when you think about going to the marketplace to buy shares?

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [17]

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Sure. And I want to start off with the fact that I am not a stock valuation expert nor do we have -- employ anybody who are stock valuation experts. I leave the performance of the stock up to the market. I do believe in one factor; that is that the market will follow performance, sooner or later. The waves, we might not be able to find those, but I do believe if we perform well, that our stock is going to follow. Now, regarding our valuation of following. Our P/E ratio is in the low to mid-teens. And the market is -- our competition is at least higher but they're all above, I believe, about 20. So we're low to mid-teens; they've over 20. In terms of EBITDA, including cash, we're at around 8x valuation; and excluding cash, we're around 7x EBITDA. So that, considered to the overall market, is lower. Now, whether I want to say that is undervalued stock or a great value stock, I'm not sure about those valuations. I do believe it's a great investment for us. We also have a dividend yield of around 4%. The main point I'd like to make is that we're not valued as a growth company, yet in the past years, we've shown strong growth. And for the long-term investors, that has been very good and we continue to believe that is a very good option, and that's why we value it as an attractive investment.

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Jeffrey Richart Geygan, Global Value Investment Corp - President, CEO, and Chief Compliance Officer [18]

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I would agree in terms of your ability to effect growth in your top line, which you've done very well and consistently over time. I would also add to your commentary that if your market cap is $90 million and you have $20 million-ish in cash, which you really do in terms of cash and long-term receivables, that the valuation starts to look far, far more attractive. And to boot, the dividend has, as you've mentioned, been paid consistently for 57 quarters. So I think you guys are doing a good job. I appreciate your time today. I want to wish you luck going forward.

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [19]

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Thank you, Jeff, really appreciate that.

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Operator [20]

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(Operator Instructions) I'm showing no further questions at this time.

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Simon F. Nynens, Wayside Technology Group, Inc. - Chairman, CEO and President [21]

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Thank you. We appreciate everyone's interest in our company, and we look forward to reporting regarding our second quarter performance at the end of July of this year. Thank you so much.

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Operator [22]

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Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone, have a great day.