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Edited Transcript of WSTG.OQ earnings conference call or presentation 12-Aug-20 9:00pm GMT

Q2 2020 Wayside Technology Group Inc Earnings Call

SHREWSBURY Sep 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Wayside Technology Group Inc earnings conference call or presentation Wednesday, August 12, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Edward Bass

Wayside Technology Group, Inc. - VP of Vendor Development at Lifeboat Distribution

* Dale Richard Foster

Wayside Technology Group, Inc. - CEO & Director

* Michael Vesey

Wayside Technology Group, Inc. - CFO, VP & Principal Accounting Officer

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Conference Call Participants

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* Edward Moon Woo

Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media

* Sean Mansouri

Gateway Group, Inc. - MD

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for participating in today's conference call to discuss Wayside Technology Group's financial results for the second quarter ended June 30, 2020. Joining us today are Wayside's CEO, Mr. Dale Foster; the company's CFO, Mr. Michael Vesey; the company's Vice President of Alliances for Lifeboat Distribution, Charles Bass; and the company's outside Investor Relations adviser, Sean Mansouri with Gateway Investor Relations.

By now, everyone should have access to the second quarter 2020 earnings release, which went out this afternoon at approximately 4:05 p.m. Eastern Standard Time. The release is available in the Investor Relations section of Wayside Technology Group's website at waysidetechnology.com. This call is also available for webcast replay on the company's website. Following management's remarks, we'll open the call for your questions.

I would now like to turn the call over to Mr. Mansouri for some introductory comments.

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Sean Mansouri, Gateway Group, Inc. - MD [2]

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Thank you, Cherie. Before I introduce Dale, I'd like to remind listeners that certain comments made in this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements.

These forward-looking statements are also subject to -- are also subject generally to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any forward-looking statements, which speak only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements.

Our presentation also includes certain non-GAAP financial measures, including adjusted gross billings; adjusted EBITDA; net income, excluding separation expenses; and non-GAAP earnings per share as supplemental measures of performance of our business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with the SEC rules. You'll find reconciliation charts and other important information in the earnings release and Form 8-K we furnished to the SEC this afternoon.

I'll now turn the call over to Wayside CEO, Dale Foster.

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Dale Richard Foster, Wayside Technology Group, Inc. - CEO & Director [3]

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Thank you, Sean, and good afternoon, everyone. First and foremost, the health and welfare of employees, vendors and customers remains our top priority during these difficult times. Despite the obvious COVID-19 challenges the world faced during the second quarter, we continued to execute on our strategic plan and serve as a valuable partner to our vendors and customers as we navigate the effects of the pandemic. I've been very impressed with the way our team has risen to the occasion and the focus they have demonstrated. In fact, although several of our key vendors experienced softer volumes in this quarter, which in turn impacted our margins and profitability, we drove a 12% increase in sales during one of the most turbulent periods of recent memory.

Our sales partially benefit from the acquisition of Interwork in May, but we also generated growth with other emerging vendors on our line card. Our ability to grow even in this challenging environment underscores the continued demand for our high-touch approach to selling and servicing our customers' needs. I'm very grateful for our team's resilience and dedication.

Across our industry, technology vendors struggled with supply chain disruption, postponed customer orders or delayed projects with various -- within market segments. Small to medium-sized businesses, in particular, have been severely impacted by the economic shock of the pandemic, especially as they were quickly required to shift to remote work on the onset of lockdown orders. However, many vendors and customers have utilized this time to focus on optimizing the resources and costs often by implementing technology solutions to make their operations more efficient for their customers and employees alike. In this environment, we are focused on partnering with current vendors to help them meet their customers' evolving technology needs.

We also continue to add vendors -- new vendors to our network even amid the pandemic, which is a testament to the investments we made to enhance our vendor recruitment process and sales and marketing over the past 18 months. Charles will provide an update on our vendor initiatives, but I'm incredibly proud of our team's work to sustain our growth in this area by diversifying our revenue streams and even driving an increase in average selling price per transaction during this quarter.

As many of you may have seen, in May, we rebranded our core Lifeboat Distribution business to Climb Channel Solutions. This name change more fully reflects our refreshed focus on emerging data center, cloud and security products, which are all experiencing strong demand amid current remote work conditions. Our Climb brand is showing our customers and vendors that the Climb teams are ready to take on any challenge, work hard to achieve the goals we set and work together to increase our reach as we climb. We are keenly focused on driving growth and increasing market share with emerging technology products.

While we cannot predict the long-term effects of COVID-19 on our industry, our network or our business, the improvements we have made to our sales operations and vendor recruitment over the past 18 months has positioned us to continue to deliver on our strategic initiatives while helping our vendors and customers navigate these turbulent times.

With that, I will now turn over the call to Charles.

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Charles Edward Bass, Wayside Technology Group, Inc. - VP of Vendor Development at Lifeboat Distribution [4]

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Thank you, Dale, and good afternoon, everyone. As Dale just mentioned, we were excited to rebrand our company from Lifeboat to Climb Channel Solutions during the quarter. We've received very positive feedback. Customers and vendors have already commended us for making the change to reflect our strategic focus on emerging data center and cloud-based brands. And although we have a new name, we're operating with the same highly dedicated sales team, and we're proud to be going to market with a name that better represents our operational progress and high-touch differentiated service levels. All of our representatives are committed to further executing on our vendor alliance strategy through identifying and evaluating and onboarding emerging tech partners that we can grow with for years to come.

During the quarter, we added several key new vendors that illustrate the breadth of emerging partners that will drive our future success. One of those partners was Zendesk. Zendesk is an extremely successful SaaS company that makes -- supports sales and customer engagement software that's quick to implement. It scales to fit changing business needs. They're a publicly traded company that has shown excellent growth and market penetration. They came to Climb to enhance their existing routes to market and drive incremental sales through distribution.

On the other hand, another vendor we added in the quarter was Liqid, which is a information technology company that provides comprehensive composable infrastructure. Their product is a leading-edge and potentially disruptive technology in the market. And they're a fairly early-stage start-up that's just beginning to create their routes to market. They came to Climb so that we could help them effectively create their sales channel together. We believe these 2 vendors' additions kind of reflects our ability to partner with different types of technology companies at various stages of their growth cycles. Their addition to our partner portfolio will be an excellent fit as we continue driving our sales momentum going forward.

Moving on to Interwork. We made excellent progress with our integration, following the acquisition in May. We've now onboarded all but 2 of the existing Interwork brands onto our client systems, and we expect to have the final 2 brands fully onboarded by August. As we look ahead to the third quarter, our most immediate area of focus is on launching our own self-service cloud marketplace. Businesses and consumers alike are increasingly dependent on virtual and cloud-based infrastructures, especially in this heavily remote work environment. So we want our own cloud offerings to meet the needs of our vendor partners in this evolving marketplace.

We're optimistic about our strategic direction and continued sales execution, especially in the face of COVID-19 challenges across our industry. As we continue to navigate this new environment, we'll continue to develop vendor relationships while working hard to offer a unique set of services that differentiates us from alternative routes to market.

So now I'd like to turn the call over to Michael to provide more details on our financial results. Michael?

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Michael Vesey, Wayside Technology Group, Inc. - CFO, VP & Principal Accounting Officer [5]

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Thanks, Charles, and good afternoon, everyone. First, I'd like to remind everyone that our second quarter financials include operating results of Interwork effective May 1, 2020.

Now turning to the quarter. Net sales in Q2 increased 12% to $56.6 million compared to $50.7 million for the same period in 2019. Climb Channel Solutions, formerly Lifeboat Distribution segment, net sales in the second quarter increased 15% to $54.2 million compared to $47.3 million, while TechXtend segment net sales were $2.4 million compared to $3.4 million in the prior year. Adjusted gross billings, a non-GAAP measure, increased 11% in the second quarter to $158.7 million compared to $142.6 million for the same period last year.

Gross profit in the second quarter was $7.1 million compared to $7.8 million for the same period in 2019. While we are driving revenue growth with new vendors and inorganic growth, we have been challenged by lower gross margins, resulting in part from accelerated discounts and rebates and partly due to lower volumes from some of our established vendors, which we believe is a transitionary situation related to the current macroeconomic environment. Year-over-year comparisons were also impacted by approximately $400,000 of nonrecurring benefits related to vendor discounts and marketing event income realized in the second quarter of 2019 that did not occur in 2020.

One of the accelerated discounts we proactively implemented this year was an early pay discount program with a large customer of ours, which is very much a net positive for us. Under the new terms, we are conceiving approximately $300,000 of gross profit per quarter going forward in exchange for reducing the collection cycle by approximately 60 days. This program drove our cash position up 3x to $45 million this quarter.

Moving on, SG&A expenses in the second quarter were $6.4 million compared to $5.6 million in the year-ago quarter. As a percentage of revenue, SG&A increased 20 basis points to 11.2% compared to 11% in Q2 2019. The increase was driven by several onetime nonrecurring expenses related to our settlement with North & Webster Group regarding their unsolicited proposal and director nominees as well as costs associated with our acquisition of Interwork Technologies.

Net income in the second quarter of 2020 was $600,000 or $0.13 per diluted share compared to $1.9 million or $0.41 per diluted share for the same period in 2019. The decrease was again driven by costs related to our settlement with N&W and the Interwork acquisition. Adjusted net income, which excludes these costs, was $1.1 million or $0.27 per share compared to $1.9 million or $0.41 per share for the same period in 2019.

As a reminder, we are continuing to use adjusted EBITDA as a non-GAAP metric as we believe it is a useful supplemental metric to assess our profitability and company value. In the second quarter, adjusted EBITDA was $2.1 million compared to $2.7 million for the same period in 2019, with the decrease driven by the aforementioned lower gross profit and margin concessions. Effective margin, which is defined as EBITDA as a percentage of gross profit, was 29.3% compared to 34.9% in the prior year period.

Cash and cash equivalents increased $45 million at June 30, 2020, compared to $15 million at December 31, 2019, and we remain debt-free at both June 30, 2020 and December 31, 2019. The increase in cash was primarily driven by the early pay discount program with one of our large customers. This increased cash and working capital has not only provided us with a strong liquidity position to navigate the uncertain COVID-19 environment but has also provided us with more cash to invest in our business than we've ever had in our 35-year-plus -- 35-plus year history. We're very excited about this new financial flexibility that will enable us to accelerate growth and profitability in a way that we never could before through both organic and inorganic means.

We've also maintained our ability to return a significant portion of our earnings to shareholders in the form of a dividend. On August 4, 2020, the Board of Directors declared a quarterly dividend of $0.17 per share of common stock payable August 28, 2020 to shareholders of record on August 24, 2020.

This concludes my prepared remarks. I'll turn the call back over to Dale.

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Dale Richard Foster, Wayside Technology Group, Inc. - CEO & Director [6]

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Thank you, Mike. And before we open up the call for questions, I wanted to provide a deeper update on our integration of Interwork. For the full integration anticipated to be completed during the fourth quarter of this year, I'm pleased to report that the overall integration up to this point is progressing very well and meeting and, in certain aspects, exceeding our expectations.

Our Canadian and U.S. Climb Channel sales teams along with their respective marketing teams are both integrated now. And as Charles referenced, they are already working to deepen our relationships with existing vendors and customers in both geographies. We continue to expect an additional $1 million of annualized adjusted EBITDA from Interwork after driving further operational and financial synergies over the next couple of quarters.

To summarize our call today, we have effectively navigated one of the most challenging periods of time in our nation's history. We continue to serve as a vital partner to our vendors and customers as reflected by our margin and profitability concessions in some areas over the near term. We know that deepening our relationships and being there for vendors when they need us most will only benefit our business in the long run. We have more cash on hand today than ever before to continue driving growth with emerging vendors on our line card and further diversify our revenue streams.

And last, in a very short period of time, we have begun to realize the benefits from this management team's first acquisition at Wayside. We are very much in the early innings of accelerating growth and profitability for years ahead as we position ourselves as a premier technology distributor for emerging data center, cloud and security products.

And operator, with -- we'll now open up the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question will come from Ed Woo with Ascendiant Capital.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [2]

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Yes. Congratulations on the quarter and also on the integration of the acquisition. My question is do you feel that you could do additional acquisitions near term? And also, what does the M&A landscape look like? Has there been more opportunities and as valuations come down?

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Dale Richard Foster, Wayside Technology Group, Inc. - CEO & Director [3]

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Thanks, Ed. This is Dale. A couple of things on that. I mean we're going to -- we'll do the same thing, right? We're looking for organic growth. I mean that's a focus that we deal with every day. And then the inorganic side, you're right. I mean, what are the actual targets that are out there? And it depends on how far out of our sweet spot that we want to go to look at those targets. There are targets throughout all the different geographies. But it really depends how far out of that. And Interwork was just such a good fit for us, and we're finding out that it's even better fit for us with the teams and who they brought over, who we got to know and where they fit in the organization. So that was a very easy one. And looking back on it, was the right thing to do. So we'll continue to look for those more in the cloud space, of course, and of course, in the software application pieces.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [4]

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Great. And then my next question is, I know you mentioned that you had some pockets of growth, but then you had some other partners that had lower revenue. What are you seeing currently? Are you seeing just a generalized return back for some of those other customers? Or is it going to be a longer time path to return back to business?

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Dale Richard Foster, Wayside Technology Group, Inc. - CEO & Director [5]

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It's not -- not that we've talked about what we did [and fly], but I mean, as far as you look at what we saw and it was more of a delay than anything else. So everybody goes into lockdown. Everybody gets working from home. And it seems like, hey, it's good, it's fresh. Everybody is getting things done. But then it's kind of like a fatigue set in, and it's just the processing all the way to the end user that, I think, delayed a lot of things. So we haven't seen orders that we were tracking disappear. It's just taking longer to process and we'll see that in this quarter as far as it picking back up.

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Operator [6]

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At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Foster for closing remarks.

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Dale Richard Foster, Wayside Technology Group, Inc. - CEO & Director [7]

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Yes. And thanks, operator. And just to follow up, we had our Board meeting last week, and we have new Board members on. We have a refreshed Board that's subsequently from 2 years ago. It's just been a very positive impact. It becomes more of a business discussion than a lot of these meetings that we have. So I want to thank them, thank the exec team. And most of all, the employees have been great. Everybody stepped up. They figured out how they were going to do and be productive at home, and we're seeing that and we did that very quickly in Q2. And it's just following on. We're hoping that the customers and vendors catch up as quick as we were able to transfer to that during that lockdown order. So thank you to shareholders, and this will conclude our call.

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Operator [8]

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Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.