Climb Global Solutions Inc. Q1 2023 Earnings Call

Yeah.

Good morning, everyone and thank you for participating in today's conference call to discuss climbed global solutions financial results for the first quarter and at March 31, 2023 join US today, our climb CEO Mr. Dale Foster the company's CFO , Mr Drew Clark and the company's investor relation.

Advisor, Mr. Shawn Mansouri with elevate I R.

By now everyone should have.

Access to the first quarter 2023 earnings press release, which was issued yesterday afternoon at approximately 405 P. M. Eastern time. The release is available in the Investor Relations section of crime Global solutions website at Www Dot climb global solutions Dot Com. This call will also be available for webcast replay.

On the Companys website following management's remarks, we'll open the call for your questions I'd now like to turn the call over to Mr. Mansouri with introductory comments.

Thank you Amy 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.

A lot of 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 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.

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 as supplemental measures of performance of our business.

All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules.

You'll find reconciliation charts and other important information in the earnings press release and form 8-K, we furnished to the SEC yesterday.

Now I'll turn the call over to climb CEO Dale Foster.

Thank you, Sean and good morning, everyone.

As you can see our momentum from 2000 <unk> record year is carried into our first quarter with significant growth in all of our key financial metrics. Our performance was driven by continuing to execute on our core initiatives generate generating organic growth with existing vendors, while adding new vendors to our line card. In addition, we continued to drive growth.

Margin expansion from our integration of <unk>, which we acquired last August of last year exclude.

Excluding the spinnaker, we generator generated double digit growth on both the top and bottom line demonstrating the strength of our core business as we continue to scale our line card in the U S and abroad.

<unk> 18 vendors that we evaluated throughout the quarter, we signed agreements with only four of them demonstrate our commitment to a limited line card that is focused on the most innovative technology brands in the market.

Like to highlight one of the latest partnerships that we launched in Q1 in North America.

Partner with logic gate, a vendor that was first part of this clinical portfolio of vendors. They are a leading provider of transformative risk and compliance solutions delivered on their risk cloud platform. We look forward to growing our relationship with logic as we continue to scale our business globally.

As many of you are aware M&A will continue to be an important component of our growth strategy. As we continue to evaluate potential targets that would extend our geographic reach add strategic vendors as well as enhance our climate team.

We began this initiative in 2020 with the acquisition of Interwork technologies, a Toronto based value added specialty distributor followed by the acquisition of Cvs Group, a U K cloud software IP distributor and service provider.

As I mentioned earlier last August we completed the acquisition of spinnaker. Another UK based channel distributor focused in the EMEA region.

Accretive transactions.

These accretive transactions have not only extended our geographic reach beyond the United States, but have also enabled us to reap the benefit of cross selling opportunities between each entity in each region.

This is further reflected in our recent.

Entry into the French market with <unk> relationship with vast data we expected we expect additional cross selling opportunities as we expand our reach across new regions.

Quickly commenting on the macro environment, we do see a potential slow spend across our regions, mainly in hardware sales, which could have a downstream effect on software sales for example, less investments in hardware such as laptops computers and servers could lead to a reduction of various endpoint solutions.

With the recent announcements of both large vendors and customers right sizing of our businesses, we will be paying close attention to where we can maintain our growth while being adaptive and agile to the needs of our customers.

We believe the core segments of the market, where we focus which includes emerging technology companies operating in cyber security storage HCI data management network connectivity and cloud are somewhat insulated from the broader issues impacting other verticals. As these are key areas of investment for most companies.

Looking towards the remainder of 2023, we expect to continue to drive continue to drive organic growth and further improve our operating leverage as we scale our business with a strong balance sheet and pipeline of M&A targets. We continue to be selective as we pursue acquisitions that will not only be accretive to our business, but well aligned with our culture and strategic goals, we have set the <unk>.

For 2023, with a strong first quarter and look forward to delivering another year of exceptional growth and profit profitability.

That I will turn the call over to our CFO drew Clark and he'll take you through the financial results drew.

Thank you Dale and good morning, everyone.

Ill get to the exciting content and I get the boring.

As we discuss our first quarter financial results I'd like to remind everyone that all comparisons and variance commentary referred to the prior year quarter unless otherwise specified.

So let's get started.

Q1 results marked our eighth consecutive quarter of double digit profitability improvement little qualifier Dale likes to remind me that I was only here for seven of those as reported in our earnings press release, adjusted gross billings, which is a non-GAAP measure increased 29% to $306 7 million compared to $238 7 million in the year ago quarter.

Yeah.

The increase was driven by organic growth from new and existing vendors as well as the contribution from our acquisition of spinnaker, which closed in August of last year.

In addition, net sales in the first quarter of 2023 increased 19% to $85 million compared to $71 3 million, which reflects double digit organic growth from new and existing vendors as well as the contribution from spinnaker offset by a slight reduction due to the impact of FX.

Gross profit in the first quarter increased 27% to $15 2 million compared to 12.0 to.

The increase was primarily attributable to 20% growth from new vendors in our existing top 20 vendors in both North America, and Europe as well as contribution from spinnaker less the FX impact of our international business.

Gross profit as a percentage of adjusted gross billings remained flat at 5% and as a percentage of net sales increased 110 basis points to 17, 9% compared to 16, 8% in the prior year quarter.

SG&A SG&A expenses in the first quarter were $10 3 million compared to $8 2 million for the same period in 2022 SG.

SG&A as a percentage of adjusted gross billings decreased to three 3% compared to three 5%.

Net income in the first quarter of 2023 increased 23% to $3 3 million or <unk> 74.

Per diluted share compared to $2 7 million or <unk> 61 per diluted share for the comparable period in 2022.

Adjusted EBITDA in the first quarter increased 33% to $5 7 million compared to $4 2 million in the prior year period again. This increase was driven by organic growth from both new and existing vendors as well as contribution from spinnaker adjusted.

Adjusted EBITDA as a percentage of gross profit or effective margin increased 170 basis points to 37, 2% compared to 35, 5% and year ago period, as we continue to see operating leverage in our business.

Turning to our balance sheet cash and cash and cash equivalents were $61 7 million on March 31, 2023, compared to $22 million at December 31, 2022, while working capital increased by $3 million during this period.

Increase in cash was primarily attributed to the timing of receivable receivable collections and payables.

We expect cash and cash equivalents to returned to normalized levels moving forward as.

As of March 31, 2023, we had $1 7 million of outstanding debt from the term loan that closed in April 2022 for which the proceeds were used to fund certain capital expenditures.

We had no borrowings outstanding under either our $20 million or 8 million Sterling credit facilities.

Subsequent to quarter end and consistent with prior quarters.

Board of directors on May <unk>, 2023 declared a quarterly dividend of <unk> 17 per share of our common stock payable on may 19th 2023 to shareholders of record on May 15th 2023.

As I mentioned in our last conference call I'd like to reiterate the recurring nature of our business is in distribution and solutions company, we do not generate recurring revenue in the traditional sense of a SaaS model. However, we do generate reoccurring revenue as we continue to average roughly 85% of renewal rates with our customers every year.

While the macro environment remains uncertain, we have not experienced any impact to our renewals up to this point and continue to carry this expectation moving forward.

Looking ahead, our strong liquidity position continues to provide us with the flexibility to execute on both organic and inorganic growth initiatives, while our scale enables us to expand our relationships with vendor networks and customers across the globe.

Regarding our M&A efforts as Dale referred to them, we will continue to evaluate targets that we can enhance our geographic footprint. In addition to our service and solution offerings, we look forward to delivering yet another year of growth and profitability in the year ahead. This.

This concludes our prepared remarks, we will now open it up for questions from those participating in the call.

Operator back to you. Thank you.

As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

Our first question comes from Vincent Glitchy with Barrington Research Your line is open.

Yes.

Yes.

Yes.

Good morning, gentlemen, nice quarter.

So in terms of your.

Your commentary related to the economy.

And then you had mentioned no issues for renewals as of yet.

Curious if there's any signs of economic impacts such as pushed.

Pushback on pricing any changes in sales cycles or if any of your vendor categories are slowing a bit.

That.

Would be any response to that would be helpful.

Yes, Thanks Vince.

Some of the comments come from we had our partner Advisory Council.

Last week, so we have big customers small customers. They are all of our top 20 vendors. So just noise in the marketplace like I said in the commentary right sizing of some of these companies on the vendor side and the customer side. So maybe a little softness on that on that piece of it like I said, we feel pretty insulated because software. So we don't.

We have to deal with the logistics side of things and then just the product mix that we sell.

People I think drew drew mentioned that often that people are not going to not have protection under the network for the security, whether it's endpoint, whether it's firewall. So a lot of that software that we cover.

Across our whole portfolio is pretty critical to the infrastructure. So.

We're just going to keep an eye on and that's why we kind of mentioned it we do see some stuff out there in the broader market.

So our security and data management your fastest growing categories and I assume you expect that to continue if it is yes.

They are the fastest and they're also very large right. So whether when you when you look at the security piece of it and what we sell.

Cyber security is just a big.

Collect all for either.

Security for endpoint security for your data to protect from ransomware. It was <unk> fastest growing markets out there and same thing in the data center space and we cover both but so we do a lot of data movement data management products when people want to get into the cloud and then they realize you know what I don't know.

I have all my critical into the cloud I'm not I don't want a hybrid setup. So they'll have some on prem as well or they'll do a shared local data center with another company in our company.

So those are definitely the two fastest we still have just great.

<unk> into the Dev ops space and Thats, why youll see more and more products that we sign there and Thats just unique I think the margins potentially are better in certain areas and we're continuing to look I mean, we have six categories that we self defined that we sell into but that doesn't limit us to say, we can you know what.

There is another another group of products that fit with us that are adjacent that we might add is another part of our portfolio.

Drew you had a nice year over year improvement in adjusted EBITDA margins.

Assuming your sales momentum continues can we expect a.

Similar year over year improvements going forward.

Yes, I think.

Yes.

We don't provide quarterly guidance, but.

I'd say that were.

Cautiously optimistic that the trend that we've had sequential year over year improvement will continue to deals point.

We have a high renewal rate people are not going to discontinue renewing.

Security applications that protect endpoints all the way back into the data center.

We'll let slowdown potentially but we're again cautiously optimistic confident that we'll continue to have the growth that we've experienced over the last several quarters.

And.

In terms of the acquisition market.

I'll have valuation has improved.

If we see the economy weaken here do you think it may make you more a bit more cautious or do you think you'll take advantage of.

Better pricing.

We're opportunistic so hopefully we'd take better.

Of pricing that's out in the market and now we have both for North America I've mentioned before and then it's really our target as western Europe , but they are still sell some in the U S.

We haven't seen a lot of change there I think people are really focused on their internal business is right now not that we haven't had the meetings. We haven't signed the NDA as we have quite a few out there that we continue to scope out but.

But nothing that really nothing really has changed there of course, we'd be looking for a discount but then.

What are we actually getting in that business as it really in the right space and we're going to do it very strategically.

As we've done in the past three.

Thanks for answering my questions.

Thanks, Matt appreciate it.

One moment for our next question.

Our next.

<unk> comes from Howard root individual investors your line is open.

Thanks, Pat Good morning, and congrats Dale and drew just simply outstanding quarter.

This go around.

You hear me okay.

Yes, Howard don't tell us we're boring we know we're boring.

But who gets the award for the funny as CFO , but that's a very.

<unk> pool so.

Damning with faint praise.

Two questions I had today, one kind of housekeeping item one bigger picture that was keeping us on the stock grant that you announced.

The company announced to you Dale a week or two ago with 75000 shares.

My question is not on the amount because I don't consider that to be disproportionate at all but it's on the idea of the immediate vesting, where as I see it I think it's about a $1 $3 million G&A expense, that's going to all hit in Q2.

And without the vesting, it's kind of a one time grant and it doesn't have the golden handcuffs.

Thing over the next three or four years to keep you, where we need you which is in the CEO role. There acquiring can you give any I know it wasn't your decision because you are the recipient debit, but can you give related the boards why that happened how that happened and is this a one off deal or is this part of the compensation package because it's just very unusual in my experience.

Ill.

And drew can chime in as well, but it's more of a one off deal and its really a timing issue Howard that this.

A couple of things.

Let me just go back five years ago, when the company had an entire different slate of board members and we've done a lot of things really on the governance side, we've created committees that werent created before.

<unk> done a lot of things from <unk>.

<unk> out audit firms lawyers, you name it and one of the things that we lacked and we took care of in 2022 was compensation Committee and we brought on a consultant to help us through that process. So it was really a timing catch up.

It's not ideal, but we'll get we'll get through it.

You won't see something like that again it'll be more into.

Just the regular flow and we'll share a lot of that stuff as we go forward yes.

I would augment sales commentary with.

A couple of things that the board did.

Currently.

Gail referenced we the board through the compensation Committee engaged an external comping.

Compensation consulting firm that was very helpful to the comp committee and the board.

Worked hand in hand, with the management team to create.

A new compensation program that is really salary bonus and long term incentive plan that changes some of the metrics we have today and some of the timing. So there is a three year cliff vesting is going to be put into place with our <unk> program.

We also engaged legal counsel to help harmonize the named Executive officer compensation agreements. So we pulled this all together and without getting into too much detail there were.

Some adjustments made to deals employment agreement, where he gave some things back to the company in connection with that plus rewarding him for the historical performance I think all the shareholders would absolutely applaud if you will book.

Dale joined and you look at the stock price today, you should be extremely satisfied with the performance of the company, but the deal's leadership. So there was a number of factors that went into that one time grant, but as Neil mentioned.

It's not something that will occur again, and we believe with our executive employment plans in place there are plenty of handcuffs.

Incentives for us to sit here and drive value for the next five plus years.

Alright, just to.

A follow up on that.

Correct.

About a $1 3 million dollar expense that will hit in Q2 on that one grant correct there will be.

Operating expenses will flow through the income statement from my perspective, yes, it's going to be EPS reduction, obviously, but if you look at it.

<unk> EBITDA for us, we always add back share based compensation and thats not going to be recurring so to your point could we have done some type of multiyear vesting.

Yes, possibly but we just felt that this was the right solution from the compensation Committee of the board and there was I think satisfied with the end result.

Okay.

Bigger picture and much bigger picture I mean, a year ago.

Applauding you guys crossing $1 billion of adjusted gross billings and now you are annualizing at $1 2 billion, 20% growth.

And I was always told trees don't grow to the sky, but I don't have an appreciation for where you are in kind of reaching your market potential at $1 2 billion. It sounds like a big number, but you're playing in a huge huge industry and so if you take your slice of that.

And just in general terms not asking for specific guidance, but are you in the early innings the middle innings. The later innings of excluding acquisitions, just organic growth with your approach and adding these four really focus new product offerings say every quarter.

Is it something that you can continue with this 20% growth and not reached the upper end of your market or are we kind of is there is too much to ask over the next couple of years.

Yes, Howard Here's my take and that is if you look at the three competitors that we talk about the smallest one being about $40 billion.

Sales.

GAAP between where they play and where we are is that we could double in size without anybody even knowing how we are other than.

The companies that are coming out of startup phase looking for a market.

I never I tell of manufacturers and vendors that we sign I never want to tell them how to go to market, but if they choose to go the route that we actually can get their products into very quickly and we're all in with them.

Once they pick that route then we'll start.

Putting our resources towards that so yeah can we double and triple in size.

I see that.

If we look at the next.

Five years, I don't I don't see any obstacles.

There's that many vendors coming out I just can't tell you how many call with my my vendor Alliance team dose per week on a new vendor that we've never heard of before so it used to be in the early days you know five years ago. We were with my team loves to say we were desperate. So we are going to find anybody that can fog, a mirror and say hey, we just need to really build out our line card now.