Q3 2022 Wayside Technology Group Inc Earnings Call
Yeah.
Good morning, everyone and thank you for it are dissipating and today's conference call to discuss claim global solutions financial results for third quarter ended September 32022.
Joining us today are claims CEO , Mr. Dale Foster.
The Companys CFO , Mr. Jim Clark.
The company's Investor Relations adviser, Mr. Sean Mansouri for you elevate IR.
By now everyone should have access to the third quarter 2022 earnings press release, which was issued yesterday afternoon at approximately four <unk> PM Eastern time.
The release is available in the Investor Relations section of client Global solutions website at Triple Double you had thought claim global solutions Dot com.
Okay.
Call will also be available for webcast replay on the company's website.
Following management remarks, we'll open the call for your questions.
I would now like to turn the call over to Mr. Sean Mansouri 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 subject to certain known and unknown risks and uncertainties.
As well as assumptions that could cause actual results.
Can 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 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 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 and effective margin.
Supplemental measure the performance of our business.
All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules.
Youll 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 <unk> CEO Dale Foster.
Thank you Sean and good morning, everyone. We continued to execute on our core initiatives during the quarter as reflected by the addition of several new vendors to our line card, while generating more than 30% organic growth with our top 20 vendors.
This resulted in another strong quarter of growth and profitability, both up double digits over the prior year.
As I have mentioned in the past our commitment to a limited and focused line card allows us to partner with the most innovative brands in the market.
This past quarter, we evaluated 36, new perspective brands and signed agreements with only three including a few I'd like to highlight.
In this past August we finalized our agreement with social security and API Security Company that provides protection platform to prevent attacks using machine learning and AI to automatically and continuously identify and protect the API.
We view the social security offerings as truly next level security for the modern data center.
Shortly after in September we partnered with beyond identity SaaS platform, which is empowering the next generation of secure digital business by replacing passwords with fundamentally secure certificates.
But beyond that any approach creates an extended chain of.
Of trust that includes the user.
Device identity logs, along with real time information of devices security posture ended application.
We believe that the cloud native solution that will enable our partners to offer a more efficient and password list solutions. We look forward to an excellent partnership with the plant began identity team.
Most significantly during the quarter.
We closed the acquisition of Spinnaker, a UK based IC channel distributor focused on storage cloud security and data management across the EMEA region.
With a deep executive bench that brings over 40 years of ICU distribution experience Feniger F 15, new vendor partners to the climate umbrella, most notably that data in a significantly enhanced enhances our distribution capabilities in Europe as of October spinnaker has been fully integrated into the climb operating and reporting structure.
<unk> and <unk> did not have a material impact on Q3, we now have begun to realize the benefits from the acquisition in Q4, I would like to publicly welcome Gerard Brophy in the entire spinnaker teams of the client family.
Looking ahead, we will continue to be diligent in our M&A strategy as we evaluate new targets, both domestically and abroad with a strong balance sheet and growing pipeline of targets. We can be selective as we pursue acquisitions that will be accretive to our business in line with our culture and strategic goals.
Turning to recent changes across our senior leadership I would like to highlight <unk> former CEO Gerard Brophy has taken over as the Chief revenue officer climb in EMEA.
Gerard is a seasoned executive in distribution and has a deep understanding of how we differentiate climate in the marketplace. Additionally, Matt Whitton will be taking over as chief operating officer and EMEA. While it continues to head the grey matter solutions business globally. We are looking forward to having Gerard and mess deer Hunter next phase of growth.
Overseas.
Finally, as I'm sure you've heard and noticed we rebranded to climb global solutions.
Solutions became effective earlier this week, our new ticker symbol CBL MB growing our brand at scale has always been a key initiative across this business given our acquisitions and global expansion over the past few years. The time was right to rebrand our company to climb global solutions.
Changing not only our public company name, but our marketing and branding efforts will allow us to promote one uniform uniform brand that is recognizable to our investors our customers our vendors and across the globe.
And the year ago quarter.
The increase reflects continued growth from our new and existing vendors.
With limited contribution from our acquisition of Spinnaker This past August .
However is Dale previously noted spinnaker is already positively impacting our business in the fourth quarter, which we will be able to further highlight during our next earnings call.
In addition, net sales in the third quarter of 2022 increased 11% to $76 $3 million compared to $68 $9 million <unk>.
Excluding the negative impact of foreign exchange net sales actually increased 12% to $77.5 million.
Gross profit in the third quarter increased 19% to $13 5 million compared to $11.3 million.
Increase again was primarily driven by organic growth from our top 20th vendors in both North America and Europe .
In addition to the Onboarding of new vendors and the impact of several large customers not taking a portion of the early paid discounts are.
Gross profit as a percentage of adjusted gross billings was 5.1% versus 5.0% and as a percentage of net sales was 17.7% compared to 16.4% in the prior quarter.
Now let me address are SG&A expenses total SG&A expense in the third quarter was $9.8 million compared to $8 $1 million for the same period in 2021.
Total SG&A as a percentage of adjusted gross billings was three 7% compared to 3.6%.
The slight increase in SG&A was attributable to the following variable Commission expense.
Attributed to the increased sales volume.
Acquisition related costs that are separately identified on the income statement excel.
Acceleration of the amortization expense from our UK ERP also specified on the income statement and the Onboarding of our spinnaker team, which as I mentioned previously did not have a meaningful contribution in Q3, but will have a meaningful contribution in queue for net.
Net income in the third quarter of 2022 was $2 $2 million or 50 cents per diluted share compared to $2.4 million.
455 cents per diluted share for the comparable period of 2021.
I would like to point out that excluding the negative impact of FX net income actually increased 6% to $2.6 million or 59 per diluted share.
There was no material impact from FX in the prior year quarter and.
In addition acquisition related costs of approximately $400000 reduced are reported EPS by 10 cents per diluted share.
Adjusted EBITDA in the third quarter increased 17% to $4 $9 million compared to $4.2 million for the same period in 2021.
Increase was driven almost entirely by organic growth from both new and existing vendors adjust.
Adjusted EBITDA as a percentage of gross profit or effective margin was $36, 6%, which continues the sequential growth of the first two quarters of the year.
This compares to 37, 4% for the third quarter of 2021.
However, excluding the approximate half a million dollars increase in foreign currency transaction loss are effective margin in the quarter was 43%.
Turning to our balance sheet cash and cash equivalents were 24.0 million for September 30th 2022 compared to $29.
$2 million at year end, while working capital decreased by approximately five 7 million during this period.
The decrease in cash was primarily due to the acquisition of spinnaker.
In addition, cash in their working capital position was impacted by the previously referred large customers differing are forgoing payments at the end of the quarter.
Amos we're still in accordance with contractual terms, but beyond the window to earn an early pay discount.
As of September 30th 2022, we had $1.9 million of debt outstanding with no borrowings outstanding under either or $20 million or 8 million Sterling credit facilities.
Subsequent to quarter and on November 1st 2022, our board of directors declared a quarterly dividend of 17 per share of our common stock.
That dividend is payable on November 18th 2022 to shareholders of record on November 14th 2022.
As we looked at the end of 2022 and into next year, we remain diligent in our M&A strategy. As we are constantly evaluating targets that can enhance our geographic footprint. In addition to our services solution offerings, both in the us and abroad.
We look forward to executing on our plan is closeout 2022, and delivering another year of strong organic and inorganic growth in 2023.
This concludes our prepared remarks and will now open it up for questions from those participating in the call.
Operator back to Ya. Thank you everyone.
As a reminder to ask a question you will need to press star one one on your telephone once again that is star one one on your telephone keypad.
Please stand by a lovely compiled the Q&A roster.
Alright, so we have.
First question coming from the line of <unk> from Barrington Research.
Caroline is now open please ask your question.
Good morning, gentlemen, nice corner.
Yeah.
I'm curious what is your pipeline of new vendors look like for Q4, and do you expect to add a similar number of emerging technology vendors. Thank you for.
I'll just give you the inside from our team you know we were evaluating and they come to us on a consistent basis I think the pipeline is still in the high teens right now I see <unk>, what I can see right now about one coming on for sure and Q4, but like I said I think before Vince we're trying to slow.
It down.
You know and just trying to go upstream as far as the the what.
You think those vendors can perform at.
[noise]. Thank you <unk>.
A question about the economic backdrop, any signs of changes and sales cycles or or any change in behavior in any of your geographic markets.
We have not so if you look at you know last year, we talked about it was slipped into.
Into the next quarter, but we didn't see contracts or any kind of big orders that would actually get cancelled. So we have and have not seen that as well. It's it's pretty much you know all systems go for us, finishing up strong in Q3 and actually we have some good roll over in the queue for.
And a question for drew as we looked for Q4 should we expect a similar year over year.
Year growth trajectory, an adjusted gross billings and up and gross margins as a percentage of gross billings should receive that approve year over year.
I would say that at this point in time, we're very confident that will continue to have the.
Increase.
<unk> and Q4, we've got some initial visibility in his tail mentioned no headwinds that we're experiencing either with our customer base or with our vendors. So without trying to provide too much guidance or direction. I think it's we're confident that we're going to continue to have another strong quarter in Q4.
And one last one for me and I'll go back in the queue any changes in the acquisition market from the economy multiples getting any more attractive.
Okay.
Yeah, No that's fine Okay. Dale Dale is really built a great pipeline into your point Vince with a strengthening dollar that is kept getting some fullback now with the Canadian and the euro and the GBP, but will will continue to be very diligent in our negotiation process and I think we'll be able to take advantage.
<unk> of our strength and some of the opportunities where they may be a little more flexible or negotiate their maybe.
Enhance negotiations that can be in our favor, but the pipeline.
All the on the queue right now.
Okay I'll go back in the queue. Thanks, gentlemen.
First question. It comes from the line if Howard <unk> Howard. Your line is now open. Please ask your question mourning Dale Andrew can you hear me okay.
Okay.
Great. So so nice quarter again.
[noise], another boring quarter, which I like but I got kind of three questions here. The first one on the spinnaker acquisition.
C. As you closed on it August 18th so it'd be like six weeks out of this quarter would have spinnaker and I'm I'm not I'm kind of confused as to why it would have an immaterial effect can you kind of go over what the contribution was from that and the revenue adjusted gross billing and SG&A expense for the quarter.
More about that in queue for as far as you know one of the bigger vendors is called that data. If you look at that data you know and crunch base or were.
You can find what they raised a zebra a lotta money.
The really high speed data data centers faced some of their customers or you know considered you know wall Street for transactional high transactional space, so they're going to be very lumpy Howard because the deals are very large if we look back at the history in the last couple of years you know we're talking in a multi million dollar deals that are.
Are coming in so you'll see them lumpy, although you know with some other brands that they brought on board now they're indoor entertainment like we said they are integrated as of October My full sales team and our sales seems we're actually integrated November 1st So everybody has their their assignments will be able to talk about in more detail and keep it in the queue for.
Could you give some kind of a scope on an annual basis I understand it's lumpy Oh, that's good news because it's coming.
In the next year, but do you have a scope of the the adjusted gross billings or not.
Net revenue that you expect to be added from Senator.
Yeah.
As we look in the queue for.
Yeah, we're gonna add somewhere between just on spinnaker his performance somewhere between 10.
$10 million to $20 million.
Is a good range right now much lower than that in the six weeks February that you referred to alright, probably slightly over a million in adjusted gross billings with an ice GB associated with that but then we also absorbed approximately 12 team members and the cost structure associated with that again very low opera.
Sitting expense low overhead costs associated with spinnaker. So it's an easy almost tuck in similar to what we did with Ah and it works out of Canada.
Almost two years ago, but they will be a a meaningful contributor in queue for in in the next year and his tail mentioned with some other vendors.
A much higher margin profile, which is nice there is going to be this lumpiness. It occurs because of the cycles of these data center sales, but also details point as we cross pollinate their vendors with our team and vice versa.
Think that they'll have some some additional contribution associated with our growth in queue.
Beyond for 2023.
Okay, great and and the SG&A contribution for spinnaker and what of.
The increase in Q3, how much of that was for spinnaker and do seem to obviously for a full quarter and the fourth quarter, how much more will come from that.
I think <unk>.
<unk>.
Impact on SG&A was about 400000 for spinnaker.
And then if you looked at the M&A cost and looked at the increase amortization expense, which was really.
When we acquired Cvs over in England.
They had an investment in their ERP that they implemented.
We had an expectation of its useful life now with our new European implementation, we've reduced that useful life period down so you'll see that increased amortization expense also in Q4 and Q1 of next year.
And then it'll be fully amortize as we implement the new ERP and then I don't have an exact number on the increase of variable carpet associate with our commission expense, but that was a meaningful peace of the SG&A.
Growth.
Okay, great. Thank you very very helpful. Second question on foreign currency transaction loss and.
Standard dollar has been strengthening but you know it's two quarters in a row, where that's hit fairly materially unexpressed line. If the dollar Stabilises, where it is is that go away in queue for have you looked at hedging that so we don't get whipsawed by the foreign currency actions, but what what's your thought on the foreign currency transaction last line.
Looking forward and what you can do to offset that.
Sure Great Great question, and you're right. Unfortunately, we did have the whipsaw effect of.
Sterling against the dollar in Canadian dollar against the U S. Dollar we didn't have a full hedging strategy in place and we suffered the the results I will tell you. This of the $500000 identified as a foreign currency translation translation loss into.
Two three <unk>.
85000 of that was actually realized from settled contracts either on the bedroom or the customer.
Customer side. So again, you've got a 415000 that has just recorded but not recognized and that will decrease are already it's gonna change in queue for so we're hesitant to try and go into a more deliberate hedging strategy as the dollar continues to sort of pull back against GBP.
In Canadian dollars, you'll see actually a positive impact most likely in queue for and then we'll see what happens in 2023, okay.
Okay, great and it finally more more on a positive future outlook side Dale last time, you talked quite a bit about last conference call you talked about acquisitions and your appetite for at this time and talk about it much what what do you see I mean, you've got a phenomenal underlying organic growth rate here your top vendors are producing and you've got a new.
[noise] ones coming online clearly it seems to me at least that you don't need to do acquisitions to hit your top line revenue, but yeah acquisitions, especially creative ones like you're doing add to it and what what is your kind of your appetite for it what do you think about your ability to digest more acquisitions and you know the difference.
Between the organic growth rate in any acquisition inorganic growth that you forecast for the next several years.
So I'm going to be opportunistic out of our appetite is very strong for acquisitions, we can be selective as you've seen as be selective in you know like.
The nice thing about the spinnaker as we were able to get them Onboarding very quickly into our systems and then as we go to newer European New West everybody will come onto one system. The middle of next year. So the pipeline through said statements, but it's still a strong python installed growing up who we're talking to and just going back to the <unk>.
<unk> and why you know besides that data and some other lines coming over there are located just outside of London and one of the things we lacked over there we were afraid it having vendors for a long time, they're producing and you know getting really entangled those and vendors with those vendors, but what we lack just like we lack when he came here five years ago.
To recruit team. So now we have that team we have the U S one and with Gerard.
It comes from the World of exclusive networks, one of our competitors in big tax he will be our go to recruit person for vendors and also bedding. The ones, we have and we're gonna you'll see a strategy that we you know we really don't get into the long tail of all vendors that we actually transact with that long tails being pushed through our climb elevated team will have the exact.
Same thing in the U K and in Europe .
<unk>, where we will pushed those vendors down and really focus on our top 40, which bring in you know over 90 per cent of all of our revenues. So still withdrawing appetite a lot of good targets like we said you know some of the U S mostly in Western Europe and.
Will continue to be selected this week.
<unk>.
Great.
Congratulations again on another outstanding boring quarter, exactly what I liked to see and wonderful in today's markets to see the transforming thanks.
Thanks, I appreciate it and you don't have to use waste any more and pick on us about that so I appreciate it [laughter] no I love. The name change I think you mentioned it over a year, maybe two years ago I'm glad you finally got to it and continue to make great progress with the business more importantly.
You got it thanks Howie from your favorite executive going team.
[laughter].
Great. Thanks, guys.
Alright, Sir for your next question. It comes from the line of case, you'll pass from I M. F Y K C. Upon your line is now open please ask a question.
Once again <unk> for a million F Y. Your line is now open. Please ask your question.
Alright, we're moving onto the next uhm analyst <unk> question from <unk> from bouncing research.
And sent to your line is now Wilton place.
I have a question about the solutions business, a relatively small business, but an important component of your business.
Curious how it performed in the quarter and then.
Giving your pipeline of acquisitions and organic expectations should we expect solutions to increase is a portion of the mix and 23.
We do.
I can imagine.
We can talk without it was allergic to <unk>, the gray matter and I would also like to include the cloud Knowhow because that's our our our team that does it services, we're expanding what their capabilities are and they're actually gonna support us in the U S with some of our vendors for first and second call support.
The nice thing about our solutions and you know there's Vince from the knowing the market is the the margin profile is you know almost double of what we do on the distribution side, but.
But if I look at my my grandmother, a team. They all 70 per cent of the business comes from selling the Isps, which we would consider almost like resellers or msp's and they do sell the msp's.
That's I'll definitely area that we're going to invest in on that team and we we've got potential targets to enhance the same both U S.
You'll see coming and then abroad as well.
That's it for me. Thank you again nice quarter.
Thanks Man.
Alright presenters there are no further questions at the moment I would now like to turn the conference back to Mister Dale Foster for closing remarks.
Thank you everyone.
All sorts of all of our sakes.
We'd go include to look for another strong finished 22 and the priest everybody's before.
This features today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during <unk> you can dial 911.
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