Q3 2021 Wayside Technology Group Inc Earnings Call

Good morning, everyone and thank you for participating in today's conference call to discuss Wayside technology groups financial results for the third quarter ended September 30th 2021.

Joining us today are waist is C E O. Mr. Dale Foster the company's C. F O. Mr Drew Clark and the companies Investor Relations adviser, Mr. Sean Man, sorry, with elevate I R.

By now everyone should have access to the third quarter of 2021 earnings press release, which was issued yesterday afternoon at approximately 415 P M Eastern time.

The release is available in the Investor Relations section of Wayside technology groups website at Wayside technology Dot com.

This call will also be available for webcast replay on the company's website.

Following management remarks will open to call for your questions I'd now like to turn the call over to Mister, Missouri for introductory comments.

Thank you.

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

Or looking statements.

These forward looking statements are also subject 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 are being made only as of the date of this call except that required by law. The company undertake no obligation to revise or publicly released the results of any revision any food.

Looking statements.

Our presentation also include certain non-GAAP financial measures, including adjusted gross billing and adjusted EBITDA.

[noise] 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 sharks and other important information in the earnings press release.

<unk> K, we furnished to the SEC yesterday.

Turn the call over to waste side CEO Dale Foster.

Thank you Sean and good morning, everyone. As you can see from our results in the earnings release, we had a very strong quarter all of our teams are performing well, including our C. D. S team in the UK I spent time with him earlier this month and will add more color later, Nicole we've seen a significant increase in the number of potential vendors approaching us to distribute there.

Solutions, which continues to be encouraging this has led us to be more selective in who we are who we incrementally onboard with emerging Brian brands, while our sales and marketing teams continued dress sales with a complete line of strategic with vendors we've.

We've signed several new emerging partners during the quarter. The more notable new partnerships include new agreement with branches in August branches as an open source cloud computing software company that produces leading edge container and cloud management products.

Oh I'm also entered into an agreement with enabled this past quarter distributor MSP solutions enable as a global provider of software that helps companies navigate the digital digital evolution.

With flexibility technology platform and powerful integrations enable makes it easier for msp's to monitor manage and secure their environment. Our sales teams believe that both of these new partnerships will be significant growth drivers as we move forward.

Selling up in the acquisition of C. D. S. In the UK, we are now coming up on our one year anniversary of the transaction.

Able to meet the entire team last month in the U K and it was clear that we made the right choice and acquiring CDF.

Climbing gray matter teams mirror, our energy and commitment to both vendors and customers along with their focus on growing their respective businesses.

Overall this past year, we have seen both teams sharing innovations vendors systems and our cloud marketplace offerings. One of the key vendors C. D. It says is the Microsoft with agreements to sell both direct and indirect or Microsoft <unk> business is up 26% in Q3 of 2021 versus two three.

<unk> and 2020.

For perspective emanate targets, we're in active discussions with multiple parties as we evaluate opportunities in the U S and abroad.

As a reminder, we were focusing on targeting companies that will be accretive to earnings and fit our strategic direction the potential targets will fit into one or more of our defined categories geographic reach vendor perspective for services and solutions, we have ample room on our balance sheet in that capacity to fix.

Keep both tuck ins and acquisitions of sauce.

The distribution landscape over the last quarter of seeing additional consolidation with the mergers and acquisitions being completed by Ingram micro by platinum partners and Tech data by Cynics. This leaves just three major broadline distributors worldwide, including Arrow as a third with combined revenues over $130 billion.

Think that this will have a positive impact on our business as the large competitors will be focused internally on integrating their corporate teams and systems with potential disruption corruptions to their vendors and customer base.

Large more established vendors are looking to have more than one distribution relationship, which provides us with more targets and fits into our value added distribution will go to market place.

During the third quarter, we unveiled our new climbed expedition cloud marketplace. As we briefly discussed in August or New club marketplaces design for M. S P's and hybrid bars to explore and transact with vendors that are moving into a subscription based model of sulfur delivering the initial <unk> bunch of the expedition marketplaces received.

Excellent feedback and more of our vendors to reach out to be part of it was seven vendors lunch. Today 14 are in the pipeline at different stages preparing to make their debut as.

As we look towards the future our commitment remains focused on building a marketplace that highlights emerging technologies well it enabling our partners to transact. However, they would like to transact cause so many customers and vendors moving from perpetual licensing to structure to a subscription based model. The club marketplaces will play a key.

<unk> role in the future claims distribution strategy.

Overall, our partners continue to recognize or unique ability to actively so and market their products to channel customers.

Spending on security data center in cloud product lines are at all time highs and we plan to continue capitalising on this market momentum by providing a streamlined and effective sales channel four partners.

With that I will turn the call over to drew to take you through the financial results through.

Thank you Gail and good morning, everyone.

Jumping right into our results all comparisons and variance commentary refer to the year ago quarter, unless otherwise specified.

As reported in our earnings press release that sales in the third quarter of 2021 increased 13% to $68.9 million compared to $60.9 million.

This reflects both continued organic growth and the impact from the acquisition of C. D F.

Excluding the acquisition, we increased net sales by 1.2 million year over year with CDF contributing an estimated 6.8 million.

However, the more indicative number of our sales growth is of course adjusted gross billings.

<unk> measure, which increased 33%.

$226.9 million compared to 171.0 million in the year ago quick.

We generated strong organic growth of 20% or 35.4 million with incremental contributions of $21.4 million from C. D. S.

Gross profit in the third quarter of 2021 increased 56% to a record $11.3 million compared to $7.2 million and the prior period.

R. G. P grew to 16.4% of net sales compared to 11.9% as a percentage of adjusted gross billings the increase was 5.8% versus 4.2%.

Again, the increase was driven by organic growth and the addition of $2.4 million from our CDF acquisition.

SG&A expenses in the third quarter or 8.1 million compared to 6.4 million with the increased primarily related to the incremental costs from the operations of C. D. S.

As well as costs related to investments in our business that we expect will drive continued growth in the quarters and years ahead.

S T and E expense as a percentage of adjusted gross billings decreased to 3.6% during the third quarter compared to 3.8% in Q3 of 2020.

Net income in the third quarter of 2021 increased more than four times to 2.4 million or 55 cents per diluted chair compared to a half a million or 13 cents per diluted chair.

Adjusted EBITDA in the third quarter increased 128% to $4.2 million compared to $1.9 million. This.

This increase was driven by operating leverage can be after mentioned organic growth and acquisition benefits.

Effective margin defined as adjusted EBITDA as a percentage of gross profit increased significantly to 37.4% in the third quarter of 2021 compared to 25.6% in the prior year quarter.

This is a great indication of our ability to leverage our core operations and to successfully integrate our acquisitions.

Onto the balance sheet.

Cash and cash equivalents for 29.9 million as of September 30th 2021, compared to 29.3 million as of year end December 31st 2020.

We remain that free with no borrowings outstanding under either or 20 million dollar U S or 8 million pound UK credit facilities with Citigroup.

On November 2nd our board of Directors declared a quarterly dividend of 17 cents per share a common stock payable on November 19th to shareholders of record on November 15th.

Looking to the end of 2021 and into next year are strong liquidity position in operating cash flow continues to provide us with the flexibility to execute on both our organic and acquisition growth strategies.

This concludes our prepared remarks will now open it up for questions.

Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.

If your question has been answered or you wish to remove yourself from the queue simply press the pound key.

Again, if you have a question or comment at this time. Please press Star then one on your telephone keypad.

Our first question or comment comes from the line of Ed <unk> from Ah submit capital your line is open.

Yeah. Congratulations on the corner. My question is on the outlook for 2022 as we're heading into the you know.

End of the year, how does your enterprise customers feel about business next year.

Can you think that I appreciate it.

We don't get we don't give guidance.

No, but as far as just the actual underlying feeling I think I think it said it before it's pretty optimistic when we thought that projects were cancelled you know during the whole Covid times. They actually just got pushed back or seeing some of those come in and we we experienced that in the in the third quarter and you know we just feel like we have a lot.

That the business building up as well.

As I mentioned before the vendors same optimism they're out they're hiring you know as fast as they tend to build up their sales team. So I don't I don't see a downside going into 2022 is we're focused you know right in this corridor ready with one must behind us.

Great have you seen sales cycles dot returned back to normal or are they still a little bit extended.

It it depends on it depends on the product mix right. So for dealing with anything that's a hardware where you'll hear about the supply chain issues. If it's going to the data said something that's gonna take longer that's coming from overseas. Yeah. We see those pushed out we see it in a couple of our solutions business that were waiting and it's gonna be something that we were playing out for Q Q4 is coming into Q.

To one of 2022, but other than that you know 90% of our business what software delivery a licensing so we don't see any disruption there.

Great and my last question is is there any real differences between the business environment in Europe, and North America are they both pretty strong.

Yeah is it the same thing that I think the energy is ahead of us in Europe at least in our you know 80% of our business and Europe as in the U K and being there for a week I just feel like they're ahead of us as far as that would say recovery, but just opening up in certain areas like we have the coast here that are they're kind of tight.

Over there that's just wide open everybody's been traveling you know they've opened up the E U between between all the countries are so I think maybe you know just like the the pandemic when it hit you know they were ahead of us as far as what we see is what they already went through so we're we're on the opposite side.

Great well, thank you and wish you guys. Good luck.

That's good.

Thank you. Our next question or comment comes from then on of Bob sales from L. M. K capital management. Your line is open.

Hi, Uhm congrats.

Congrats on a quarter can you expand a little bit on the marketplace offering you have and maybe.

You sort of too fast it so like to know more about his one is.

How do you see this positioning relative to the other players there.

Uhm exclusively focused on on it and to maybe guide our expectations in terms of what you.

Hope to achieve in physical 22.

<unk> revenue or some other metric that we could just understand.

Yeah. Thanks, Thanks, Bob So look at it two two different ways. We have competitors that that are traditional distribution that are getting into the cloud delivery system basically.

And then you have ones that are born in the cloud like a packs a or a of onto that are already have that cloud offerings that they started with so there's the two sides of it we fit in with a traditional distribution network going into a delivery model a subscription base, where there's monthly quarterly yearly on that side. So what.

What we're seeing is that it's we haven't parsed between the two because it's the way our vendors want to go to market or basically their capabilities to go into the market. So right now they're doing perpetual licenses. They all want to switch to some type of a cloud based just delivery subscription whether that subscription.

Is monthly or it's a consumption based so you'll see our our business internally will see it shipped from one to the other and then of course, we hope to grow in both of those places, but it we're not gonna see you know just this huge cloud piece take off without you know some of the slowdown in the Perps.

<unk> side. So it's just the way that they're gonna go to market and we just want to make sure. We're ready for that we thought we were way behind we realize that it's really our vendors that are the ones that were waiting for so our first enter enter in as our our club marketplace called expedition, we're pushing that every day. We are we are growing quickly with companies like wasabi.

<unk> that there's also a consumption based and once we get our two platform stuck together and just becomes more efficient that way, but it's hard to really monetize it right now because it's just early into the the stage of it and our vendors are early into than being able to deliver through a a platform.

Okay. The second question.

I actually have two more questions I don't think there's gonna be a ton of traffic question why so I'll I'll shoot them both <unk> both at you if that's okay.

Did you see any signs different clear signs and sort of the broader I T space and a a spending soda can you talk a little about about whether or not you saw any of that trickle through the leading edge stuff you know maybe whether there was there was a little lighter to the upside then you hope for in the quarter a anything I can just.

Give us a sense of of of the impact on on the leading edge business that you serve within the context of the <unk> the slower party.

Slower, but slow slowing broader market.

Yeah. So we don't what we see we we track the the broader market cause it does have some trends tours, but if you look at the vendors that we actually service and sell their you know we talk about it all the time, they're emerging so they're just coming out of the start up phase it depends on where they are in their life cycle as far as where they're spending right what's there.

Next tranche with money they got what series it is and they're expanding that way. So we don't and if you look at emerging vendors when when the the market is growing at you know four or 5% and just overall I T software hardware, we should be in the you know the high single digits, the low double digits.

As far as the growth goes because it's something new this might be trying to go against the Cisco or one of the big tier one. So we just don't see that as much we track the date and we see some of the trends, but it's really our focus on.

It is the vendor we picked up disruptive how disruptive are they and where are they on that lifecycle. So it's it's kind of hard protective if you look at our our top two vendors you know sofas and solarwinds they kind of get some key indicators is there growth and we talk about those in the releases, but you know they they both solarwinds has been recovering and sofas as with a lot of the new.

Product mix in there come into the channel has been great. So.

You know, we we take that and let me get.

Okay and then.

Cushing is for me is when.

When you think about sore the next act.

Acquisition.

Desire your last one what took you overseas, where you you Gotta tell holding euro when you look at what.

As in your mind or what what what will motivate you in the next acquisition or two <unk> can you sure thinking with us.

Yeah. So the thinking is and we have such you did claim that we follow you know and I talked about it as far as is it a geography is it a a vendor similar to when we acquired inner works and when we got the trend micro relationship. So we look at like probably four factors as far as it is a good target. The the other one is services can we add more technical services and start.

To do that swinging the company it it'll it'll be tough to move the needle, but the the gross profit margins you want services everybody's talking about for 10 years are much higher so we're looking at that space as well. So yeah, there's still some targets in the U S. Not specifically a perfect fit for us and distribution, but more of the service in solution.

Saw that we're talking too and then the other thing is you know, we're bringing solutions capabilities from the U K.

Into the U S C, you'll see more and more now since a that probably in the next yeah. We're we're announcing in Q1, you know some more cloud marketplace on the solution side, but you know we we sign you know multiple N D. A is talking to companies. Some good targets and it's gotta be a cultural you know fit.

With our management team and their management team and then yeah of course to the greater sales and marketing teams.

Okay, Thanks, and congratulations again.

Thank you I appreciate it.

Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad. Our next question or comment comes from the mind of Howard Route Your mind is open.

And really you know building on the success and the first two quarters of the year, It's just outstanding progress.

I have I have two questions one on the the subscription model and that kind of a shift or the grow within the cloud based retribution and since subscription is there how does that change if at all your financial model and it says there's I'm looking at in particular I'm looking at it from adjusted gross billings.

Getting about a 5% gross margin and then SG&A, beating somewhere around 3.5%.

The the SG&A being more of a fixed expense going up incrementally with growth based on acquisitions, the 5% gross margin being just basically off of <unk> Jessie gross billings line and did you see that changing when you go more subscription to cloud base or is that going to be more continuation of what you have now.

Yeah, you're you're right on target Howard and that is.

The efficiency model of doing a cloudware M S P or a hybrid bar can actually log in a manager subscriptions. It doesn't involve as much have you lived on our side. So of course, we want to move in that direction. Because you know it's just our SG&A costs will will go down as we deliver those we're waiting it like I said on the vendors I'll I'll I'll pick two vendors.

And I talked about wasabi, wasabi consumption base, where the leading distributed they have in the world right now in the numbers aren't very you know, they're not off the charts, but it's it's a R. R. So it's a recurring revenue that won't stop and when that happens and then the numbers are smaller per month per consumption.

There's there's more margin to be had there and when we're noticing that you know of course, we want it to be a bigger part of our business, which will be keep driving that and then if you look at the company like Sofas, which is you know a prescription that are subscription base and then it also has firewalls that has some hardware to go with it the the the goal is and.

So closest done a good job as the ship the firewalls, and then oldest subscriptions that they'll need to add capabilities. The firewalls will all be a cloud based platform, where they download and it's just give me a download and your billing. So it's really important for us to get the efficiency side that we do not have touches when customers want to transact that way and yeah.

Are we there I would say, where you know less than 10%.

Overall into that space right now and this time next year, that's a number of probably 30 per cent there'll be delivering that way and that's really dependent on how fast our vendors can get there.

Great. My second question is on acquisitions, and and you know thanks for laying out the overall.

[noise] strategy to chat again, congrats on Hannah works and C. D. S. I mean, those are then wonderful acquisitions in and from the financial side or from an investor sides seamlessly integrated alright, I know, there's always issues, but it just it's just hit on all marks but the one thing I'd like you to comment on is your financial parameters are as you make these acquisitions and that's in the sense of you know cash versus stock.

And then financial metrics, how do you measure the accretion of item potential acquisition into into wayside.

Sure. This this is true.

<unk> I think.

From our perspective, clearly, there's there's <unk> industry standard financial metrics that we'll be measuring valuing a business around the adjusted even though that it contributes we also need to factor in his tail referenced what type of.

Increased product opportunities to react with vendors that we may not have access to and then also factoring a little bit of which we are just starting to to be honest scratch the surface with C. D. M. There's cross-sell opportunities across the globe, where we can get global contracts in place instead of just a second north American contract with a particular vendor.

Uhm, So we'll value transactions based on traditional multiples off metrics such as adjusted EBITDA. We will look at some premium aspects of the business that may justify you know an increase in valuation.

Transactions are the size such a C D out for and it'll work, we have plenty of liquidity and working capital on our balance sheet to consummate those transactions, we will consider adding leverage because you know the balance sheet as leverage for you today and the cost of funds are relatively inexpensive historically speaking so most likely.

<unk> for a larger transaction, we would look to a combination of perhaps some cash some debt financing in terms of the term peace and.

And perhaps some some equity as well, but again those are some really to be determined.

And an hour just to be real transparent when we're looking at acquisitions. We we think that you know, especially in the emerging space, where you play. The most is that a lot of emerging companies want to get.

Festival in the U S and then and then grow to the greater the rest of the you know the world and this is kind of true <unk> with a lot of the targets that I've met with it were overseas same thing. They they have problems acquiring quickly new vendors. It takes a while the U S that everybody spends their dollars there it typically become 60, 70% of the <unk>.

Overall world market and then they grow into a western Europe or Asia pack. So we think we're good at Onboarding, new vendors and then moving them to Western Europe. So that's really our focus we think that we can move it much quicker than you know Ah six or 18 month cycle for a vendor to get to our UK team we can.

Sure and that's like what systems and just our our sales and marketing teams down doing a quarter to deliver that product ahead of our competitors you know that it's gonna take them a while to the onboard you know in the regions.

Great. Thanks, and just from Investor's standpoint, obviously, they're the stock fingers, what what concerns me if if the acquisitions in that way that the cash the deck book that you've done wonderful job with that but as soon as you start doing stock acquisitions, it it raises or the financial uhm issues.

So congrats.

Congrats on a great quarter.

Thanks <unk>.

Thank you I'm sure know additional questions in the queue at this time I'd like to turn the call back over to management for any closing remarks.

Yeah. Thanks, operator, thanks, Thanks to our employee base you know a lot of things we're moving over this last year between everybody getting back into the offices.

People back on travel and everybody's been Super supportive you know to our vendors into our customers just.

Overall team effort. So I appreciate it thanks for joining the call today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.

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