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Edited Transcript of WSTG.OQ earnings conference call or presentation 10-Nov-20 10:00pm GMT

·22 min read

Q3 2020 Wayside Technology Group Inc Earnings Call SHREWSBURY Nov 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Wayside Technology Group Inc earnings conference call or presentation Tuesday, November 10, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Charles Edward Bass Wayside Technology Group, Inc. - VP of Vendor Development at Lifeboat Distribution * Dale Richard Foster Wayside Technology Group, Inc. - CEO, President & Director * Michael Vesey Wayside Technology Group, Inc. - CFO, VP & Principal Accounting Officer ================================================================================ Conference Call Participants ================================================================================ * Edward Moon Woo Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media * Peter Lux * Cody Cree Gateway Group, Inc. - Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, everyone, and thank you for participating in today's conference call to discuss Wayside Technology Group's financial results for the third quarter ended September 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 and Marketing for Climb Channel Solutions, Charles Bass; and the company's outside Investor Relations Advisor, Cody Cree, with Gateway Investor Relations. By now, everyone should have access to the third quarter 2020 earnings release, which went out this afternoon at approximately 4:05 p.m. Eastern Time. The release is available in the Investor Relations section of Wayside Technology Group's website at waysidetechnology.com. This call is 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. Cree for some introductory comments. -------------------------------------------------------------------------------- Cody Cree, Gateway Group, Inc. - Associate [2] -------------------------------------------------------------------------------- Thank you, Mary. 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 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 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 would now like to turn the call over to Wayside's CEO, Dale Foster. Dale? -------------------------------------------------------------------------------- Dale Richard Foster, Wayside Technology Group, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Cody, and good afternoon, everyone. Our business has made solid progress in our recovery from the industry-wide lows of the pandemic from last quarter. We drove net sales and gross profit growth as we added new vendors to our line card and finalized the integration of Interwork. Our industry has slowly but surely began to stabilize since the initial impact of the pandemic. While we still see challenges in our market, our operational resilience has allowed us to continue improving our position as a sales driven organization. Some of our vendors are still in the early stages of their sales recovery, while others are seeing higher activity levels as we head into the fourth quarter. Q4 is typically one of the stronger sales periods for industry as we -- as end customers deplete their budgets and begin to plan their technology investments for the new year. This momentum is expected to pick up further in 2021 with research from Gartner predicting the global IT spend will return to growth next year. Customers are extremely -- are increasingly optimizing their cloud infrastructure, enterprise software, data centers and other IT and communication solutions to pull -- more fully equip their businesses for a more flexible work environment. Our continued focus on emerging data center, cloud and security products puts us in a strong position to continue meeting these needs in the market. With this as context, the improvements we have made in our sales and vendor recruitment process over the past year, give us the flexibility to support our existing network while driving growth with new and emerging vendors. We have sustained the strength of our relationship-based sales approach and are bolstering it even further as the cohesive sales team across North America. As of October, we have officially completed the integration of our U.S. sales team and Interwork's Canadian sales team. And this combined sales force is driving valuable cross-sell opportunities in both geographies. Charles will be on the call shortly to provide further detail on our vendor initiatives, but I am pleased with the sales momentum we have generated in Q3. Having this robust operational foundation in place puts us in a prime position to continue evolving our product and service offerings to keep pace with changing customer needs across our industry. To that end, as many of you may have seen yesterday, we announced our acquisition of CDF Group, a U.K.-based cloud software and IT distributor and services provider. As I have mentioned on previous calls, we have some gas in our go-to-market strategy in the form of true cloud offerings and a cloud marketplace to meet our vendor and customer demand. This acquisition of CDF quickly fills that gap and will allow us to provide our customer base with a nimble platform to manage software subscriptions backed up by CDF's cloud know-how support infrastructure. CDF is made up of 3 divisions: Sigma Distribution, providing software, cloud solutions and support to its VAR customer base; Grey Matter, a VAR that provides cloud solutions and software to independent software vendors; and Cloud Know-How, which is the services and support division leveraged by both Sigma and Grey Matter. Cloud Know-How holds and maintains vendor certifications with marquee vendors like Microsoft, Quest and Flexera, to name a few. As a whole, CDF brings a way to Wayside an established brand presence in the U.K. and a robust suite of services within our core product categories, especially within the cloud services. I will have more to share with the strategic -- about the strategic opportunities of the transaction later in the call. But first, I'll turn it over to Charles Bass to share a perspective and provide color on our vendor initiatives this quarter. Charles? -------------------------------------------------------------------------------- Charles Edward Bass, Wayside Technology Group, Inc. - VP of Vendor Development at Lifeboat Distribution [4] -------------------------------------------------------------------------------- Thank you, Dale, and good afternoon, everyone. The dedication and high-touch approach of our sales team has enabled us to continue executing on our vendor alliance strategy at very high levels. Our alliance strategy has remained consistent and there are essentially 2 key elements. The first entails identifying, evaluating and onboarding high potential emerging tech partners. While we spend a great deal of time and effort to successfully onboard new vendor partners, we spend an equal amount of effort to evaluate our existing vendor base so that we can continuously focus our sales efforts on our most successful brands. Our strategy has yielded both strong results and recognition from some of our key partners. In fact, Acronis, one of our shared partners with Interwork, recently recognized us as their U.S. Cyber Fit Partner of the year in their Global Partner Awards. So we're honored to maintain such strong partnerships across our vendor base while adding some key new vendors to our line card. At the end of August, we launched an agreement to begin distributing Trend Micro cybersecurity solutions to our U.S. and Canadian partner base. Trend Micro is a market leader in endpoint cloud and server security. This relationship was made possible by our integration of the Interwork, and one of several valuable cross-selling opportunities that have come out of the integration process thus far. And we look forward to making further progress to deepen our relationships with our combined vendor and VAR network. At this point, we've now fully onboarded all of the Interwork brands and are now focused on sales execution of the plans that we put in place this past quarter. In September, we announced we began distribution of Cloud Saver's AWS cost optimization solution. Cloud Saver focuses on managing company's global network infrastructure costs by continuously monitoring their cloud environment and implementing more efficient strategies and tools. This product complements other cloud products in our portfolio and creates true added value for all of our partners. Subsequent to the quarter, we made another key addition to our security product portfolio through our agreement to distribute Illumios' end-to-end segmentation platform. Illumio provides complete application visibility and control as it works to prevent the spread of breaches across any endpoint, data center, cloud, bare metal, virtual machine or even containers. So we're proud to be working with this top-tier security vendor and look forward to further expanding this partnership. As these additions demonstrate, we're making progress, not only with our revamped sales processes and cross selling initiatives, but also with our refined strategic focus on emerging data center, cloud and security products. Cloud products, in particular, have experienced accelerated demand tailwinds through the pandemic. As I mentioned on our second quarter call, Climb has been working to launch our own self-service cloud marketplace to further serve this urgent need in the market. And our recent acquisition of CDF expedites this process considerably by enhancing our cloud capabilities and expertise. With that, I'd like to turn the call over to Michael Vesey to provide more details on our financial results. Michael? -------------------------------------------------------------------------------- Michael Vesey, Wayside Technology Group, Inc. - CFO, VP & Principal Accounting Officer [5] -------------------------------------------------------------------------------- Thanks, Charles, and good afternoon, everyone. Before we kick things off, I'd like to remind everyone that our financial results include the first full quarter of operating results from Interwork. Now turning to our third quarter results. Net sales in the third quarter of 2020 increased 16% to $60.9 million compared to the same period in 2019. Climb Channel Solutions, formerly Lifeboat Distribution segment, net sales in the third quarter also increased 17% to $57.1 million, while TechXtend segment net sales increased 8% to $3.8 million compared to Q3 2019. Adjusted gross billings, a non-GAAP measure, for the third quarter increased 15% year-over-year to $171.1 million. Gross profit in the third quarter increased 3% to $7.2 million compared to $7.1 million for the same period in 2019. As a reminder, comparability of our results is impacted by the acquisition of Interwork and then early pay discount program with one of our larger customers we implemented beginning in Q2. In exchange for reducing the customer's client cycle by approximately 60 days, we are conceding approximately $400,000 of gross profit per quarter going forward under this program. Despite this slight offset to our short term profitability, we continue to view this program as a net positive as it has driven improvements in our working capital and significantly increased our cash position to $40.3 million this quarter. Total SG&A expenses in the third quarter were $6.4 million compared to $5.1 million in the year ago quarter. As a percentage of total net sales, SG&A was 10.5% compared to 9.7% in the third quarter of 2019. The increase was driven by sales related salaries and commissions, higher stock-based compensation expense and higher professional fees. SG&A expense also included approximately $200,000 of expenses from Interwork for the 3 months ended September 30, 2020, which we plan to phase out in the fourth quarter of 2020 as we complete the integration of our administrative functions. Net income in the third quarter of 2020 was $0.5 million or $0.13 per diluted share compared to $1.4 million or $0.32 per diluted share for the same period in 2019. The decrease was driven by the aforementioned increase in SG&A. Adjusted net income, which excludes the nonrecurring costs related to the unsolicited bid and the Interwork and CDF acquisitions was $0.8 million or $0.19 per share compared to $1.4 million or $0.32 per share for the same period in 2019. In the third quarter, adjusted EBITDA was $1.9 million compared to $2.4 million for the same period in 2019. Effective margin, which is defined as adjusted EBITDA as a percentage of gross profit, was 25.6% compared to 34.7% in the prior year period. The decrease was primarily driven by the aforementioned impacts to gross profit and increased G&A. Cash and equivalents increased significantly to $40.3 million at September 30, 2020, compared to $15 million at December 31, 2019, and we remain debt-free. The increase in cash was driven by the early pay count program implemented with one of our large customers during the second quarter. This strong liquidity position gives us enhanced flexibility to navigate the pandemic effects on our industry and continue executing on our strategic growth initiatives, including the acquisition of CDF. Despite our investments, we have maintained our ability to return a significant portion of our earnings to shareholders in the form of a dividend. On November 3, 2020, the Board of Directors declared a quarterly dividend of $0.17 per share of common stock payable November 27, 2020, to shareholders of record on November 23, 2020. Now to provide some additional context on our CDF transaction, which we announced yesterday. We view this acquisition as a strong opportunity to drive growth, enhance profitability and improve our strategic position in cloud services. We also see it as an effective strategic reinvestment of the working capital we recently freed up through the changes in the management of our working capital. We acquired CDF for an aggregate purchase price of approximately $17.4 million. The acquisition is expected to be accretive to EBITDA margin and net income, and increase our annual gross billings by approximately 10%, prior to any revenue synergies. Our entire organization is excited and motivated to begin integrating CDF's brands and services onto our platform. This concludes my prepared remarks. I'll turn the call back over to Dale. -------------------------------------------------------------------------------- Dale Richard Foster, Wayside Technology Group, Inc. - CEO, President & Director [6] -------------------------------------------------------------------------------- Thanks, Mike. Jumping back into our CDF acquisition. As I mentioned earlier, CDF's cloud automation platform provides cloud service optimization and end-to-end support and migration services. This is the cloud platform we've been striving to develop internally, and we plan to immediately leverage this platform across our business and geographies. Our extensive vendor network and commitment to developing emerging technology brands will increase CDF's offerings introduce them and introduce them to a broader customer base. CDF and Wayside have limited geographic and vendor overlap, which provides ample cross-sell opportunities between U.S., Canada and EMEA. This includes additional support and growth opportunities for our long-standing legacy business in the Netherlands. Climb, Sigma and Grey Matter will all leverage the Cloud Know-How business, which has a highly skilled technical team of adoption and migration specialists that have a strong expertise in Microsoft 365 Azure, bringing the -- and Azure. And bringing the Cloud Know-How specialists on board will enable us to serve as an outsourced intelligence resource for our customers, offering everything from technical support to highly targeted consulting services. This allows us to not only provide a more comprehensive than high-touch customer experience, but also capitalize on a key margin expansion opportunity as a value-add service provider beyond its distribution. Both Grey Matter and CDF's distribution brand Sigma are Microsoft Gold Partners holding 9 competencies and various direct agreements with Microsoft. Our merger will facilitate the opportunity for both Wayside and CDF to further leverage Microsoft's strong global presence in the cloud and Bing Map business along with other strategic areas. Altogether, CDF brings to Wayside more than 1,000 VARs from its network and deep relationships with notable vendors, including Microsoft, Amazon Web Services, Adobe, Manage Engine, SAP and many more. I am also pleased to share that CDF's current CEO, Andrew King, has joined Wayside as the President and General Manager of EMEA, to lead our European operations. His leadership will be a key part of facilitating our expansion and ensuring a seamless integration process between CDF and Wayside. Before we open up the call for questions, I want to thank our team for their commitment to driving relationships with our vendors and cultivate new relationships with vendors that Interwork brought out -- brought to our board. This cross-sell opportunity will only strengthen as we work to integrate Sigma and Grey Matter and expand both the geographic footprint of our network and the comprehensive nature of our product portfolio and support services. At this time, operator, we'll open up the call for questions and answers. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Your first question comes from the line of Ed Woo. -------------------------------------------------------------------------------- Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [2] -------------------------------------------------------------------------------- Congratulations on the quarter and on the acquisition. Do you see yourself being tied up with this acquisition for a while? Or are you still going to be looking for other opportunistic deals currently? -------------------------------------------------------------------------------- Dale Richard Foster, Wayside Technology Group, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Yes. Thanks, Ed. We'll continue to look. Two acquisitions in 1 year, you can imagine our infrastructure has been working hard, and we had a good gap between the two. So we're able to get the full integration of Interwork done before this one started. So yes, this will take a little bit of a different flare to it because of the cloud platform piece of it, but that's our real focus. They're going to be running independent. They have a strong infrastructure as a company right now. So they'll continue to run on their own, and we'll take the pieces between the 2 companies that make the most sense, and it will be over a period of time. But our eyes are as open to look out there. Interwork was just a great acquisition as far as it fit very seamless to what we're doing in North America. And we have high hopes for this one as well. Just a great team in the CDF group. You can imagine the excitement over the last couple of days with the teams getting to know each other on the exact level, and then we'll be digging down deeper as this week and once progress. But yes, looking forward to doing more with the teams. -------------------------------------------------------------------------------- Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [4] -------------------------------------------------------------------------------- Great. And my last question is, you guys have had pretty good results. Do you think that the business environment for software and services have returned back to normal, or do you still see that there's businesses that are still recovering? -------------------------------------------------------------------------------- Dale Richard Foster, Wayside Technology Group, Inc. - CEO, President & Director [5] -------------------------------------------------------------------------------- Yes. I still see a recovery trend on the industry segment that we see. And I think we had the fatigue of everybody trying to work from home in Q2. And then we had everybody saying, okay, now can we get our productivity back up to where it was before? I think that we're getting closer to that. And like I said, it's the industry-specific areas. We do -- and the Fed and state and local governments seem to be coming back online with some of our customers, so that's good. But we're one removed from the end user. So we kind of get it through kind of a hearsay method. But I think this quarter we'll tell what industries are back up and running. And hopefully, the ones that are back on top and along with our vendors, we'll continue to do so. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- (Operator Instructions) Next question comes from the line of Peter Lux. -------------------------------------------------------------------------------- Peter Lux, [7] -------------------------------------------------------------------------------- It seems based on your gross margin, that you -- in order to gain business as you sort of had to cut prices to retain business or grow business? Is that something that will continue? -------------------------------------------------------------------------------- Dale Richard Foster, Wayside Technology Group, Inc. - CEO, President & Director [8] -------------------------------------------------------------------------------- I don't think so, Peter. And we will continue to do that. When we have the uncertainty in the market, we look at territory by territory, and sometimes we have to do that. We chose, which is nice because a lot of companies didn't get to choose, right, what they could do or not do. The business was either gone -- was either there or not. So some -- I guess some of our bigger competitors, we chose to take orders at a less margin to keep that business transaction flowing through because we didn't want to cut staff, right? We wanted to continue to transact as we come back out of this. Of course, the recovery is a little longer than we all expected. I think that build across most industries, but I feel comfortable in what we actually did, and we'll see the margins come back as we continue to sell to our customers and what they're actually working on as projects. -------------------------------------------------------------------------------- Peter Lux, [9] -------------------------------------------------------------------------------- Are you guys still working mostly remotely or you have sort of dribbled that back to the office? -------------------------------------------------------------------------------- Dale Richard Foster, Wayside Technology Group, Inc. - CEO, President & Director [10] -------------------------------------------------------------------------------- So not in New Jersey because New Jersey has more of a lockdown. I'm in Maryland. We have some similar stuff coming on board. So it kind of ebbs and flows as the case rate goes up. But what we've been doing, and I'm encouraged my team as long as everything -- everybody is being safe is to travel as much as I can. So we have put a few of our field team traveling. And what they're doing is they're going to states that are not in near the lockdown. So myself, Missouri, Wisconsin, New York, quite a few different places along with the field teams. I have vendors that are coming in. We needed airports to do face-to-face, and everybody is looking forward to getting out. So yes, does it still really hurt the sales force? I know (inaudible) were up. He's having to struggle because people are just moving around. So as people go out I think we'll see more of that face-to-face. There's nothing better than relationship selling when you can get back to shaking somebody's hand. -------------------------------------------------------------------------------- Peter Lux, [11] -------------------------------------------------------------------------------- So Mike, this is a question for you. You had answered this question on the last call. It seems that has even gotten -- income statement has even gotten more complicated with charges and one-offs, et cetera. Is this something that you guys are going to try to clean up and have a more normalized statement going forward? -------------------------------------------------------------------------------- Dale Richard Foster, Wayside Technology Group, Inc. - CEO, President & Director [12] -------------------------------------------------------------------------------- Yes. And I'll let Mike answer that. But my take on that is we had a lot of events that have happened in the last 12 months from the proxy fight all the way through to acquisitions. And so there's a lot of messiness way more convoluted than I want it to be. I wanted to get back so much cleaner, but I'll see if Mike wants to put his 2 cents in there. -------------------------------------------------------------------------------- Michael Vesey, Wayside Technology Group, Inc. - CFO, VP & Principal Accounting Officer [13] -------------------------------------------------------------------------------- No, I think that's fine. Good answer. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- At this time, this concludes our question-and-answer session. I would now like to turn the call over to Mr. Foster for closing remarks. -------------------------------------------------------------------------------- Dale Richard Foster, Wayside Technology Group, Inc. - CEO, President & Director [15] -------------------------------------------------------------------------------- Thank you, Mary. So just a couple of things I want to talk about. We have a strong Board of Directors, very supportive of what we're going to do in the past and get to the future, a lot of input as we have people on our Board that are from the industry. One of the things -- I wanted to throw a shout out to the teams, 2 acquisitions, a lot of -- you can imagine with accounts and lawyers. So to Mike and his team, congrats. A lot of work is being done. We still have a lot more to do. I can tell you that our focus is on growth in the company. I think we've proved that in actually the direction we're going. And if you look at some of the releases that we do with manufacturers, we're going upstream with manufacturers. And what I mean by that is some manufacturer names that are much more recognizable, like if you sold the Seagate. And it's not Seagate disk drives, but it's into their solutions side. So continue to watch us. We thank for your support, and I look forward to giving an update after Q4. Thank you, operator. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Thank you.