Q4 2021 Wayside Technology Group Inc Earnings Call

Good morning, everyone and thank you for participating in today's conference call to discuss Wayside technology group's financial results for the fourth quarter and full year ended December 31st 2021, joining us today are wayside CEO , Mr. Dale Foster the company's CFO , Mr True Clark and the company's Investor.

Relations advisor, Mr. Shawn Mendes, sorry, with elevated I are by now everyone should have access to the fourth quarter and full year 2021 earnings press release, which was issued yesterday afternoon, approximately at four or five P. M. Eastern standard time.

The release is available in the Investor Relations section of Wayside technology group's website at least high technology Dot Com. This call will also be available for webcast replay on the company's website. Following management's remarks, we'll open the call for questions I'd now like to turn the call over to Mr. Mansouri for introductory remarks.

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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 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 other risks and uncertainties that are described from time to time in the companys 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 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 and adjusted EBITDA as supplemental measures of performance of our business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measure in accordance with FCC rules, you'll find reconciliation charts and other important information in the earnings press release and form.

8-K, we furnished to the SEC yesterday.

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

Thank you Sean and good morning, everyone 2021 was a record year for wayside as we generated record financial results across all of our key financial metrics, including adjusted gross billing net sales gross profit EPS and adjusted EBITDA.

The same applause to our fourth quarter results as we closed out the year on a very strong note.

As we introduced last year, our growth initiatives fall into three buckets, driving organic growth with existing vendors and customers, adding new emerging vendors to our line card and delivering on our acquisition objectives.

In our existing vendor network, we continue to execute on deepening our partnerships and increasing wallet share in 2020 . One we generated 588 million of adjusted gross billings in North America, where their top 20 vendors compared to 471 billion in the year prior.

25% increase this reflects both the value, we're offering to our partners and customers as well as our ability to evaluate and partner with the right emerging technology companies that are driving growth and bringing value added products to market.

As we've often stated in the past, we evaluate hundreds of emerging vendors each year and we are very thoughtful in our approach selecting the right partners to add to our line card for perspective during the fourth quarter alone, we evaluated nearly 40 vendors and only signed four including Alaskan solitary volcker.

And iron scales iron skills as the fastest growing emerging security solution in the world Monotype is the developer friendly full spectrum software supply chain management platform and bolster is an incredibly reliable cloud platform that offers a simple modern infrastructure, we look forward to providing a new sales channel for these companies and offer.

Their products to thousands of value added resellers and our networks turning to our acquisition objectives Q4 marked the one year anniversary of our CBS acquisition that was really our first acquisition of size in our first test is the team in terms of integration.

Overall <unk> has been excellent additions to our organization in 2021 their business grew 17% accounted for $10 million of our total gross profit and 25% of our overall growth in G. P.

The transaction has been accretive to our gross profit margin and we are still just scratching the surface in terms of cross selling our vendor networks and leveraging cost synergies, which are two areas that we will improve upon as we move forward in 2022, we expect to better leverage our vendor networks to drive growth between the regions.

And we also plan to integrate both Cds and wayside back offices onto a uniformed ERP platform, which will lead to additional cost synergies down the road.

As for potential M&A targets, we are continuing to evaluate opportunities both in the U S and abroad. As a reminder, we are focused on targeting companies that will be accretive to earnings and fit our strategic direction.

Potential targets will fit into one of our defined categories geographical reach.

Vendor perspective and servicing solutions.

We have ample room on our balance sheet and financing capacity to execute both tuck ins and acquisitions of size looking at the year ahead 2022 is already off to a great start in January we became an approved vendor for the N C. P. A contract which is a leading national government purchasing cooperatives.

There are over 90000 agencies nationwide.

From both the public and nonprofit sectors that are eligible to utilize this cooperative purchasing contract and this partnership will allow us to leverage their extensive agency network to deliver best in class security and <unk> solutions across the government healthcare and education sectors and less than a month as an approved vendor we signed our first.

N C P eight contract with data Dolby. So I believe we have a great opportunity ahead of us.

Also I want to touch on a key addition to the wayside team in February our board of directors elected Greg scores yellow to join the board as the seventh director six of whom are independent.

Greg brings over 30 years of experience, creating and building global operations for early and mid stage companies throughout his career, Greg has several international leadership and management roles with companies like immuno activity Oh and.

He currently serves as a board member strategic adviser Investor and multiple technology companies as well we plan to leverage his extensive knowledge in the European technology market to continue building our business overseas and we are thrilled to have him on our board before passing as drew I would like to take a moment to recognize the continued turmoil that has.

<unk> in Ukraine, we have very little business activity involving customers or vendors in Russia, and we have already placed a hold on transacting business with those companies our thoughts go out to the family members that are affected by this troubling turn of events with that I will turn the call over to drew and he will take you through our financial results true.

Thank you Dale and good morning, everyone. As Dale just noted we're excited to have Greg join our board and look forward to working with him and the entire board as we continue to grow wayside through our organic growth and acquisition strategies.

As we review our operating results I want to remind everyone that all the comparisons and variance commentary referred to the prior year quarter unless otherwise specified.

As reported in our earnings press release, adjusted gross billings, a non-GAAP measure increased 16% to $262 1 million compared to $226 4 million in the year ago quarter.

We generated strong organic growth of 12% or $25 1 million with incremental contributions of $10 6 million from Cvs.

Net sales in the fourth quarter of 2021 increased 6% to $75 5 million compared to 71 4 million.

This reflects both continued organic growth and the benefit from the acquisition of CBS .

Excluding the acquisition, we increased net sales by $2 $8 million year over year with C. D F contributing an estimated $1 3 million.

As we've noted before the ASC 606 adjustment to calculate net sales from adjusted gross billings is impacted by our vendor and product mix C.

<unk> is a larger portion of vendors, including Microsoft CSP solution for which our role as agent represents a higher component of the economic transaction.

In addition, several of our more recent vendors and those with higher growth rates at a larger portion of the billing related to maintenance and support which is ultimately provided by the vendor and thus not recognized in net sales.

Gross profit in the fourth quarter of 2021 increased 20% to a record $12 6 million compared to $10 5 million.

Our G P. As a percentage of adjusted gross billings increased to four 8% versus four 6%, which represented 16, 7% of net sales compared to $14 seven in the prior quarter.

Again, the increase was driven by organic growth and the addition of $1 2 million from our CBF acquisition.

SG&A expenses in the fourth quarter were $8 2 million compared to $7 7 million SG&A as a percentage of adjusted gross billings declined to three 1% during the fourth quarter compared to three 4% in Q4 2020.

This trend reinforces dale's comments on our ability to leverage and scale our investments in the business, including the integration of our acquisitions.

Another record for the company was net income generated in the fourth quarter of 2021, which increased 36% to $3 4 million or <unk> 78 per diluted share compared to $2 5 million or <unk> 58 per diluted share in the prior year quarter.

Adjusted EBITDA in the fourth quarter increased 17% to $5 1 million compared to $4 4 million. The increase was driven by the organic growth improved operating leverage and CDF acquisition benefits.

Effective margin defined as adjusted EBITDA as a percentage of gross profit was 47% in the fourth quarter of 2021 compared to 41, 4% in the year ago quarter.

However, I would like to point out the quarterly trend in 2021 continue to improve as we increased our effective margin from 37, 4% in Q3 and 32.0% in Q2.

This is an excellent barometer of our ability to grow and deliver an increasing amount of the incremental GP to earnings.

With regard to our balance sheet cash and cash equivalents held flat at $29 3 million as of December 31, 2021, compared to the same period in the prior year.

While working capital increased by $8 6 million. During this period, we continue to remain debt free with no outstanding borrowings under either our $20 million U S or 8 million Sterling UK credit facilities.

As Dale previously noted we are actively pursuing M&A opportunities and our cash position working capital and leverage balance sheet puts us in a position of strength as we move forward on.

On March 1st our board of Directors declared a quarterly dividend of <unk> 17 per share of common stock. The dividend is payable on March 18th to shareholders of record as of March 14th.

As we look ahead into 2022, our strong liquidity position continues to provide us with the flexibility to execute on both our organic and inorganic growth strategies as I just noted a moment ago.

In addition to allowing us to expand our relationships with new vendor networks and customers across the globe.

This concludes our prepared remarks, and we'll now open it up for questions from those participating in the call operator, I'll turn the meeting back over to you. Thank you.

Thank you and if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

And our first question comes from the line of Howard Rubel, He's a private investor. Your line is open. Please go ahead.

Congratulations guys just simply outstanding quarter, if you had a stock analysts covering the stock would be due for a re rating and I'm still shocked that there's no analyst covering you yet.

<unk> on the quarter.

Our ISO too quick.

Quick questions are to one quick question one longer question quick question more for drew accounts receivable kind of took a big bump up in Q4 up by about $25 million can you give me a little explanation what what happened is that a continuing trend or is that just a one time deal.

Howard Thanks, Thanks for participating in the question, we had a couple of our larger customers that.

Delayed payment toward year end, so a little bit of a double edged sword, obviously grows the receivable portfolio, but fully collected post year end the benefit though to the company as some of those.

Customers did that take advantage of early pay discount, which had a positive impact on our gross profit margin for Q4. So no no indication that there's a trend there. It was just probably a timing them doing some balance sheet management on their side.

Okay great.

And then the larger question more for Dale here is as we've discussed before I just I look at the adjusted gross billings because.

The division of bad to net sales of just an accounting decision and when I look at that the sequential jump was impressive I mean year over year and sequential up by about $35 million from 227 in the third quarter of $2 62 in Q4, and then Youre keeping the gross profit, which I look at it based on a G. P. S at four 9% or so.

When your SG&A.

Being relatively flat.

Do you see is that again is that a one off bump up or what was that massive spike from Q3 to Q4 in your adjusted gross billings and do you think that gross profit will stay there at that four 9% or one 5% of AGP in your SG&A. So if you look at those as is this a new trend for the company going forward or is this.

A onetime bump in Q4.

I think a couple of things, let's talk about the gross profit I mean, that's our goal is to be in that 5% range.

That's out there and we are always looking and we talk about it probably to Austin about jettison some of our lower margin vendors that are down the line card and replacing them with these new emerging ones that we picked and thats, what we talked about adding some more so we almost always look at that we should have a garner a higher margin on some of the new ones that we talk about when we are.

We're actually engaging with the vendor as far as the Q3 to Q4, I mean Q4, a lot of people were extinguishing the budgets that are getting the renewables bolt ons, we always see a stronger Q4 than Q.

Q3, once we build out more of our public sector practice, which you know I'm used to in my in my past life as we'll see Q3 Q3 start getting stronger as well right now we take advantage of other of our customers contract vehicles for public sector, where we want to do it on their own whether it's use of contract and then we announced the CPA contract.

So that's kind of it.

It's a good trend we have many of our vendor vendors are recovering a sofa.

So post strong as well so we're riding that wave with them.

People are getting out and and buying more and getting their system setup.

Okay. If I could sneak one last question you mentioned acquisitions, a little more than you did in prior calls.

And just on that how do you view, the use of stock versus cash and making acquisitions.

So we haven't had to use stock right now if if it's transformative where we think we have to use some of our equity or capital, we would do that but it's not.

Something we think about right off the bat it really depends on the size and help transform gives to the company and I think we talk about it because it's on the front of mind for the entire management team.

We didn't complete any acquisitions in 2021 we plan on them in 2022, but we've.

Talk to a lot of companies literally put that way and we're getting close to some of them going forward to say hey, if this is going to pull the trigger in 2022.

Well, great that again, congrats to the whole wayside team on a just a phenomenal quarter and a great 2021. Thank you. Thanks, Alan I appreciate it.

Thank you and our next question comes from the line of Bob sales with Ellen Kay Capital Management. Your line is open. Please go ahead.

Hi.

Great performance.

One comment in a couple of questions.

I would.

This playbook is just here's my comment.

Playbook is just so.

Fixed for great things.

On the bottom line for the company and for the stock price and I would just encourage you to.

Think about this continued additive acquisition playbook versus transformative with heavy stock component, which always adds.

Significant risk it just seems that there is.

So its runway for what you all are doing particularly with the new line card ads it'll feed into 'twenty two.

So, let's just let's just one investors view.

The second.

Two questions I have would be first of all can you delve a little deeper you commented on it.

S C 606.

And you made a comment about C. D F L. A larger portion of Microsoft Rev and then.

Some of your newer customers have more maintenance and just exploit that a little bit more or explain that a little bit more.

Sure Yeah, the Oh.

Again.

As Howard noted it's really the.

The accounting mechanisms at play right here versus the economics of the transactions, but.

Some of our newer vendors and those with higher growth.

When we evaluate the full economic component of what we sell.

Normally it's a software license, obviously, we do not sell a lot of hardware, so it's 88% plus.

Our adjusted gross billings and net sales our.

Related to software solutions and applications. So when when we go through the process of identifying the components of what is delivered post.

Installation by.

Our reseller into the client.

It's a mix issue at the end of the day and some of these new products just to have a higher component.

When we evaluate the economics of the transaction that relate to that ongoing support <unk> maintenance from the ultimate vendor.

Vendor.

And that's the situation with the CSP products that will continue to grow from <unk> and now that we have a full year of.

Activity in there that smaller balance in total, but it's going to continue to have a little bit of a.

The downward pressure on the net sales number, but we target net sales to be sort of in that 30% range of adjusted gross billings.

Yeah.

And we don't expect that trend to differ significantly as we move into 2022 and beyond.

Okay. Thank you.

And then.

It was the sort of the major geopolitical events going on can you can you.

We think the widespread.

Concerning unsecured across corporate and government networks can you can you give us a.

Sense of the landscape in terms of.

Sales opportunities now versus say six months ago, and whether or not you are seeing.

And incremental.

Interest in new offerings and sales inquiries.

Yeah, I'll I'll give you the.

The upside right now as far as lots of security vendors coming out there. We're looking at you can see our portfolio's heavy security and then the second portion of the data center.

Regarding the downside on the selling North America are a mix of being a majority of our sales U K is the next biggest piece and then sprinkle out throughout Europe . So that's that's really we're selling to but agree.

Agreed we had done.

Many vendors and talking about customers and their activity level, just coming to them.

For security solutions. If there is continued cyber attacks, where the actual vulnerable and we have companies like security scorecard that.

That's exactly what they do they score you as a company and then you can look and say Hey, where my holes and then you look for the actual technology to plug those holes. So I see the opportunity I don't see it off the charts because of this but.

Definitely up and I don't know if that's just more of the opening up of the world after the pandemic.

Or something different a month.

Don't have insight to that.

And would you like to.

Respond to my comment perhaps with your view of.

What would intrigue, you and tilt the scales towards.

Towards considering the trans formative acquisition debt.

That.

Might entail heavier equity component in and costs more.

Yeah, I mean, we just didn't have to be that size that may that made sense for us I mean, this is gonna be full management discussion along with our board, saying Hey does this makes sense for our shareholders.

But right now you know a lot of the.

Ones that we've done we've been able to use their own cash we still haven't tapped into any kind of debt facility. We would look at those first before we go to the equity piece.

And I can't give you a number as far as transformative to do that.

It would just based on what the acquisition look like.

Yeah, well, let me let me Sean.

Yeah, Let me, let me just reiterate dale's point, which is.

We have really strong leverage capability on our balance sheet, we are having conversations with our existing lead bank, which is city as well as others in the marketplace about what type of structures, we could put in place for acquisition financing.

So we've got to pass to be honest, one would be a cash flow.

Term type of facility.

Which youre going to get the market rate.

Leverage turn but we also have the <unk>.

A greater capacity with an ABL facility.

Utilizing our receivable portfolio combined with the acquisition target.

If we do have that transformative opportunity.

Most likely we could use.

Debt for cash on our balance sheet to consummate the transaction the question would be for us if.

There was an incentive for the seller that wanted to have some some additional upside and there could be a small equity component, but right now the management team and boards thought processes that we would look to fund the transaction predominantly with the with.

With senior and <unk> type of a financing.

Financing in place.

Yes.

The playbook I see is just the tremendous return on invested capital and operating leverage that floats to EPS accretion is just something you.

And sort of in the sweet spot of where it is right now just something you don't see out there very much. So I just think that playbook is.

Is.

Just just wonderful.

No we agree and thanks, Tim we've recorded as for promotional activities in the future.

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We get everybody in person and over 100 people I think we had over 40 reps in person. So it was great to see everybody in the energy is there I think some of it's from getting out of your house has been moving around a little bit more but.

So just a greater energy setting our plans for 2022.

We see just some great growth opportunities that we're going to capitalize on and.

I talked to my my Wayside family works every day, we have shareholders, we have employees customers and vendors all considered stakeholders. So I appreciate the stakeholders in the company and watching us and with that we can finish the call. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Okay.

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