Q3 2020 Wayside Technology Group Inc Earnings Call
Joining us today are wayside T O. Mr deal Foster the company's CFO Mr. Michael Ricci.
The company's Michael Companys, Vice President of alliances in marketing for wide channel solution China's fast.
The Companys outside Investor Relations advisor Cody Acree, Eataly Investor Relations right.
By now everyone should have access to the third quarter tiny tidy earnings release, which Mike out says afternoon at approximately four or five P.M. eastern time, the religious available in the Investor Relations section of the site technology group's website at that age tweets high technology.
This call is available for bad Kashi play or the companies say that side follow.
Following management's remarks, we'll open the call for your questions I would now like to turn the call over to Mr. Qi for some introductory comments.
Thank you Mary before I introduce deal 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.
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.
Forward looking statements are also subject generally to other risks and uncertainties that are described from time to time in the Companys filings with the FCC 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 EPS.
Measures have been reconciled to the most directly comparable GAAP measures in accordance with FCC rules, you'll find reconciliation charts and other important information in the earnings release and form 8-K, we furnished to the FCC. This afternoon.
I would now like to turn the call over to Wayside CEO Dale Foster deal.
Thank you Cody and good afternoon, everyone and business has made solid progress.
You know the recovery from the industry wide lows and then it depends on mix from last quarter, we drove net sales and gross profit growth as we added new vendors to our line card and finalize the integration of inner work our industry has slowly but surely began to stabilize since the initial impact of the pandemic or are we still see challenges in our market and operational Brazil.
Against has allowed us to continue improving our position of the sales driven organization.
He never vendors are still in the early stages of they're seeing February 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 did in customers complete their budgets and begin to plan their technology investments for the new year. This momentum is expected.
Just to pick up further in 2021 with the research from Gartner predicting the global IP spend will return to growth next year customers are extremely are increasingly optimizing their cloud infrastructure enterprise software data centers in other IP and communication solutions to pull more fully equipped their businesses for us.
More flexible work environment.
Our continued focus on emerging data center cloud and security products puts us in a strong position to continue meeting needs in the market.
With this as context the improvements we have made in our sales and vendor recruitment process over the past year gives 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 a cohesive sales team across North America.
Okay.
As of October we have officially completed the integration of our U.S sales team and then our works Canada Canadian sales team and this combined field force driving valuable cross sell opportunity in both geographies Charles would be on the call shortly to provide further detail on our vendor in this but I'm pleased with the sales momentum we have generated in Q3.
Okay.
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.
So that in as many of you may have seen yesterday, we announced our acquisition of CB up for you.
Okay based cloud software and IP distributor and service provider as I have mentioned on previous calls we have some gaps 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 C. diff quickly filled that gap and will allow us to provide our customer base with a nimble platform to manage software subscriptions backed up by a C.D. as cloud know how support infrastructure Cds.
Tds is made up of three divisions Sigma distribution, providing software cloud solutions and support teams bar customer base grey matter, a var that provides cloud solutions and software to independent software vendors and cloud know, which is the services and support division leveraged by both segment in grey matter.
Bob know how coal.
Colds and maintain vendor certifications with marquee vendors like Microsoft requests and flux there to name a few.
As a whole c. diff brings a way to wayside an established brand presence in the UK and a robust suite of services within our core product categories, especially within the cloud services.
Ill have more to share with the strategic about the strategic opportunities inside of the transaction later in the call, but first I'd like to turn it over to Charles asked to share a perspective and provide color on our vendor initiatives this quarter Charles.
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 are a light strategy has remained consistent and there are essentially two key elements. The first entails identifying evaluating and onboarding high potential emerging tech partners and while we spent.
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, the chronis one of our share.
Partners with inner work recently recognized us as their U.S. side perfect partner of the year and 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 cyber security solutions to our U.S. and Canadian partner base trend micro is a it's a market leader in endpoint cloud and server security. This relationship was made possible by our integration of the inner work.
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 under embargo network at.
At this point, we've now fully on boarded all of the entire work brands and are now focused on sales execution of the plans that we put in place this past quarter.
In September we announced we'd begin distribution of cloud Sabres FWS cost optimization solutions cloud safer focuses on managing companies global network infrastructure costs by continuously monitoring their cloud environments and implementing more efficient strategies tools. This product complements other cloud products in our.
Folio and creates true added value for our var partners.
Subsequent to the quarter. We made another key addition to our security product portfolio through our agreement to distribute the Lumos end to end segmentation platform Olympio provides complete application visibility and control as it works to prevent the spread of breaches across any endpoint data center cloud bare metal virtual much.
Gene 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.
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 service urgent need in the market and our recent acquisition of CDF expedite this process considerably by enhancing our cloud capability.
He is an expertise with that I'd like to turn the call over to Michael easy to provide more details on our financial results Michael.
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 inter work.
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.
Client 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 into work and then early pay discount program with one of our larger customers we implemented beginning in Q2.
In exchange for reducing the customers client cycle by approximately 60 days, we're conceding approximately $400000 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 ESG in 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 SDMA 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.
SGN expenses also included.
Possibly $200000 of expenses from inter work for the three months ended September Thirtyth 2020, which we plan to phase out in the fourth quarter 2020, as we complete the integration of our administrative functions.
Net income in the third quarter of 2020.
Was point $5 million or 13 cents per diluted share compared to 1.4 million or 32 cents per diluted share for the same period in 2019.
The decrease was driven by the aforementioned increase in EPS Gina.
Adjusted net income, which excludes the nonrecurring costs related to the unsolicited bid into work in CTF acquisitions.
Was point $8 million or 19 cents per share compared to 1.4 million or 32 cents 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 too.
Gross profit and increase Gina.
Cash and equivalents increased significantly to $40.3 million at September Thirtyth 2020, compared to 15 million at December 30, Onest 2019, and we remain debt free.
The increase in cash was driven by the early pay this count program, we implemented with one of our large customers during the second quarter.
The strong liquidity position gives us enhanced flexibility to navigate the pandemics effects on the industry and continue executing on our strategic growth growth initiatives, including the acquisition of CBF.
Despite our investments we have maintained our ability to return a significant portion of our earnings to shareholders in the form of a dividend.
November three 2020, the board of directors declared a quarterly dividend of 17 cents per share of common stock payable on November 27th 2020 to shareholders of record on November 23 2020.
Now to provide some additional context on our C. diff transaction, which we announced yesterday.
We view this acquisition as a strong opportunity to drive growth enhanced profitability and improve our strategic positioning and cloud services.
We also see it as an effective strategic reinvestment of the working capital. We recently, we freed up through the changes in the management of our working capital.
We acquired CBF for an aggregate purchase price of approximately 17.4 million.
The acquisition is expected to be accretive to two EBITDA margin and net income and increase our annual gross billings by approximately 10%.
Okay any revenue synergies.
Our entire organization is excited and motivated to begin integrating CBS brands and services onto our platform.
This concludes my prepared remarks, I will turn the call back over to Dale.
Thanks, Mike jumping back into our CBF acquisition.
As I mentioned earlier, Cvs cloud automation platform providers cloud service optimization and end to end support and migration services. This is the cloud platform weve been striving to develop internally and we plan to immediately leverage this platform across our business and geographies Eric.
Our extensive vendor network and commitment to developing emerging technology brands will increase CBS offering introduced them and introduce them to a broader customer base.
Media and wayside have limited geographic and vendor overlaps, which provides ample cross sell opportunities between us Canada and EMEA. This.
This includes additional support and growth opportunities for our longstanding legacy business in the Netherlands.
Climb SYGMA and grey matter, we'll all levers the club mental health 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 no, especially with onboard will enable us to serve.
As an outsourced intelligence resource for our customers.
Altering 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 capitalized on a key margin expansion opportunity as a value add service provider beyond a few distribution both.
Both really matter in CBS distribution brand Sigma our Microsoft Gold partners, holding nine competent competencies and various direct agreements with Microsoft our merger will facilitate the opportunity for both wayside in CBF.
Further leverage Microsoft strong global presence in the cloud and being met business along with other strategic areas.
Altogether CD it brings the waste side more than a thousand bars from its network and deep relationships with notable vendors, including Microsoft Amazon Web services Adobe manage engine Ecpm anymore. I'm also pleased to share that CBS 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 considerable facilitating our expansion and ensuring a seamless integration process between CBS and wayside before.
Before we open up the call for questions I want to thank our team for their commitment to driving relationships with our vendors and cultivating new relationships with vendors. The interboro broad, though Rob brought aboard this cross sell opportunity will only strengthen as we work to integrate Sigma and grey matter and expand both with your geographic foot.
Print 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.
As a reminder to ask a question you will need to press Star then the number one on your telephone can you try your question asked about the.
Please standby, while we compile that can then be avastin.
Your first question comes from the line of Ed Woo.
Your line is now open.
Congratulations on the quarter and not on the acquisition do you see yourself.
Tied up with this acquisition for a while or are you still going to be looking for other opportunistic deal.
Okay.
Yes. Thanks.
We'll continue to look.
You know two acquisitions in one 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 inner work done before this one started so yeah. This will take a little bit of a different flavor to it because of the cloud platform piece of it but that's okay.
Real focus there 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 will take the pieces between the two companies that make the most sense and there will be no over a period of time, but.
Our eyes around was open to what's out there.
Inner work is just a great acquisition as far as that 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 and the CBS group.
Imagine the excitement over the last couple of days with the teams getting to know each other and the exact level and then we'll be digging down deeper.
As this week and months progress, but yes.
Looking forward to doing more with the with the teams.
Great and my last question is you.
Guys have had a pretty good result, do you think the business environment for software.
Mrs have returned back to normal or do you still see that business that are still recovering.
Yes.
We'll see a recovery.
On the industry segment that we see and I think you know we had the fatigue.
Everybody trying to work from home in Q2, and then we had everybody thing. Okay. Now can begin to predict productivity back up to where it was before I think that we are getting closer to and like you said, it's the industry specific areas. You know, we do into the fed and state local governments, they seem to be coming back online.
Some of our customers. So that's good we're one of them moved from the end users. So we kind of get it through kind of a here say method, but.
Yes, I think this is this quarter, we will tell you know what industry to back that up.
And running and hopefully the ones that are back on top and along with our vendors will continue to do so.
Great well, thank you and good luck.
Thanks, Ed.
Okay, and if you have any questions at this time. Please press Star then the number one on your telephone.
Okay.
Next question comes from the line of Peter looks your line is now open.
Hey, guys, how you doing.
It seems based on your gross margin.
That shoe in order to gain businesses are you sort of had a cut cut cut prices to retain business will grow business is that something that will continue.
No I don't think so Peter now and we will continue to do that you know when we had 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 rate, what they could do or not do.
The business is either gone I will do that they're now so.
I guess some are bigger competitors, we chose to take orders that have less margin to keep that business transaction flowing through because we didnt want to quit staff right. We wanted to continue to transact as we come back out of the course that recovers a little longer than we all expected I think thats good across most industries, but.
I feel comfortable in what we actually did and we will see the margins for you know come back as the.
We continue to sell to our customers and what they're actually working on those projects.
Are you are you guys still working mostly remotely or you have sort of did the lack back to the office.
So not in New Jersey, because new Jersey has it as more of a lock down I'm in Maryland, we have some similar stuff coming on board. So it kind of ebbs and flows as is the case rate goes up but what we've been doing and maturities my team as long as everything you know everybody's being safe is the travel as much as they can so we have put a few of our field.
A team traveling and what they're doing is they're going to state that are not in near the lockdown, So myself in Missouri, Wisconsin.
New York quite a few different places along with the field team.
You know I have vendors that are coming in we meet at airports do face to face and everybody's looking forward to getting out so long yet because its still really hurt the salesforce I know myself you throughout the night, he's having a struggle because people are just moving around so as people go out I think we will see a more that face to face and no there's nothing better than relationship.
Selling when you can.
Get back chicken Somebodys hand.
So Mike just a question for you.
Sure and I have asked you. This question on the last call. It seems is even gotten income statement has even gotten more complicated with charges in 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.
Yes ill, 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 acquisition.
And so there is a lot of nothingness way.
Way.
Way more complicated than I want it to be I want to get back to a much cleaner, but I'll I'll see if Mike wants to put his two cents in there.
No I think that that's fine.
Good answer.
Okay, guys keep it up see later thanks. Thanks, Thanks Peter.
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.
Thank you Mary So just a couple of things I want to talk about you know we have a strong board of directors very supportive of what we're doing.
Do you know in the past and go for the future a lot of input as we have people on our board that are from the industry.
One of the things I want to do a shout out to the teams to.
Acquisitions a lot of.
You can imagine with accountants and lawyers, so Mike and his team. Congrats a lot of work has been done we still have a lot more to do.
I can tell you that the our focus is on growth in the company I think we prove that and actually the direction, we're going and if you look at some of the releases that we did with manufacturers were going upstream with manufacturers and what I mean by that is you know some manufacture names that are much more recognizable like if you sold seagate and its not seagate destroy.
But it's into their solution side, so well continue to watch us we thank for your support and look for.
Forward to giving update after Q4, thank you operator.
Ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Thank you.
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