Q2 2023 Climb Global Solutions Inc Earnings Call
Good morning, everyone and thank you for participating in today's conference call to discuss climbed global solutions financial results for the second quarter ended June 30th 2023, joining us today I climbed C E O. Mr. Dell Foster the company's C F O.
Mr <unk> Clark and the company's Investor Relations adviser, Mr. Sean <unk> with elevate I R. By now everyone should have access to the second quarter of 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 climate Global solutions website at Www climate and global solutions Dot Com. These.
This call will also be available for webcast replay on the company's website full of them.
[noise] manage remarks will open the call for your questions and I would like to turn the call over to Mister, Missouri for introductory comments.
Thanks for calling before I introduce scale I'd like to remind listeners that certain comments made on this conference call and webcast are considered a forward looking statements.
Private security litigation the format of 1995.
The forward looking statements are subject to certain known and unknown risks and uncertainties.
Assumptions that could cause the actual results to differ.
Materially problem is reflected in these forward looking statements.
These forward looking statements are also subject to other risks and uncertainties tried from time to time.
The company's filings with the F C C.
Not place undue reliance on any forward looking statements, which are being made only as of the date of this call.
Except that is required by law the company undertake no obligation to a nearby or publicly released the results of any revision to any forward looking statements.
Our presentation also includes starting non-GAAP financial measures.
<unk> adjusted EBITDA, adjusted net income and EPS.
Back in March.
GAAP measures have been reconciled to most directly comparable GAAP measures.
Orders would that D C rules.
You'll find reconciliation sharks and other important information.
Turn the call over to climb C E O L Foster.
Good morning, everyone.
Three quarter, we can send you to execute on our coordination to generate growth within our existing Bender base.
New innovative vendors to her like her this led to another period of double digit growth to the top line in her ninth executive order of profitability improvement.
In addition throughout the quarter, we made strategic investments that are operating systems, new personnel sales territory expansion and training and development programs to reinforce our foundation.
With a clean and efficient infrastructure and continuous focus on strengthening her lifeguard, we are well positioned to continue.
<unk> for growth and profitability as we scale our global footprint.
We are committed to the focus line card, which enabled us to partner with the most strategic cutting edge technology vendors on the market.
After the 30th brands reevaluated through the second quarter, sorry agreements with only four of them.
Touching on a few of our latest words first we partnered with James.
<unk> the company that provides <unk> systems management and security solutions for an Apple first environment that is enterprise secure.
Consumers simple and protect personal privacy next we finalized our agreement with offensive security.
[noise] provider of professional workforce development training for cyber security.
<unk> security will be a viable cross so within our security offerings, which is one of our fastest growing segments of our business.
And finally, we signed it get lab to our line card. The most comprehensive AI powered double check ups platform in the world.
We look forward to building a prosperous relationship with each of these vendors as we take your products to market.
In addition to our vendor wins in April we entered into a strategic partnership with another distributor radios.
Unique partnership enable us enabled us to leverage the radius one card for direct sales in other markets, while providing them with an infrastructure trying to transact.
In particular.
Excuse me radius is a strong vendor relationship obtaining cyber security assistance management company, which has been a consistent winner in the market with a commitment to selling through the distribution channel.
Expand on the mechanics of this partnership later on the call.
In late May we announced our inclusion into the Russell 3000 Index, which we became which became effective on June 26th.
The treatment is a testament to the dedication and consistent execution of our entire global employee network as well as our outstanding customers and vendors.
We celebrate this milestone by bringing in right ringing in the new NASDAQ closing Bell in Manhattan, a few weeks ago I couldn't be prouder of the team, we built and look forward to achieving even greater success in years ahead.
As we enter the back half of the year, we have a solid foundation in place to continue driving organic wrote with existing vendors, while adding new innovative vendors to a lifeguard.
Will also continue to evaluate M&A opportunities that came in and he.
<unk>, our services solutions as we <unk> as well as a geographical perfect.
These initiatives, coupled with a robust balance sheet, unable to execute organic and inorganic growth and profitability objectives in 2023 with that I will turn the call over to see about drew Clark to take you through the financial results stroke.
<unk> good morning, everyone.
As we review our second quarter financial results I would like to remind everyone that all comparisons and variance commentary refer to the prior year quarter unless otherwise specified.
We got another strong quarter, it was not quite as boring as previous eight.
Jump in.
Reported earnings press release, adjusted gross billings or a G b, which is a non-GAAP measure.
Increased 14% to $274.7 million compared to 241.8 million in the year ago quarter.
In addition that sales in the second quarter of 2023 increased 20 per cent 81.7 million compared to $67.9 million, which primarily reflects organic growth from new and existing vendors.
We have communicated before we focus on a G. B is the true metric of our growth.
The calculation of net sales is influenced by product mix and the respective adjustment to convert a G b to that sales for financial reporting purposes under gap.
And the second quarter, we had an increase in sales of products such as century that included hardware and therefore, a lower adjustment from it's a G. B two net sales.
Gross profit in the second quarter increased 10% to $13.7 million compared to $12.5 million.
Again, the increase was primarily driven by organic growth from new vendors as well as our existing top 20 vendors in North America and Europe .
<unk> was partially offset by customers taking advantage of early pages scouts at a greater level than in the prior year.
Gross profit as a percentage of adjusted gross billings was five per cent compared to 5.2 per cent as a percentage of net sales was 16.8 per cent compared to 18.4% in the prior year quarter.
Those impacted by the early pay discounts taken by our customers.
Customers in 2023 compared to 2022.
SG&A expenses in the second quarter or $11.6 million compared to 7.9 million for the same period of 2022 S.
<unk> is a percentage of gesture gross billings.
2% compared to 3.3 per cent in the year ago period.
The increase was primarily attributed to the previously announced and well deserved one time 1.8 million dollar grant a common stock Dale in April 2023.
As most investors are aware the grant is a non-cash charge it has no impact on our adjusted EBITDA.
In addition, SG&A increased as a result of investments made to improve our infrastructure is dale referenced earlier, including new personnel.
R P and training and development costs.
<unk>, which are variable expense increased over the prior year's quarter due to the growth in a G b.
Altogether are SG&A included approximately point $4 million of expenses that are non recurring in nature.
For the second half of the year, we expect SG&A as a percentage of <unk> G B.
To be more consistent with the most recent trends and decline in 2024. After we implemented our new ERP and continue to scale of operations.
It's important to note that our newly formed distribution partnership with radius.
Different economic profile that are typical vendor partnerships the economics and mechanics are such that we recognize the total a G b generated by radius.
However, we pay radius 70 per cent of their G P through SG&A.
As they are effectively running their own sales operation, while utilizing our infrastructure to transact business. Despite.
Despite the different economic profile. This partnership is accretive Tonight income and adjusted EBITDA.
Dale mentioned earlier offers directs cross-sell opportunities with their vendors and other geographies.
They didn't come in the second quarter of 2023.
4 million 431 cents per diluted share compared to $2.8 million or 63 cents per diluted share for the comparable period in 2022.
The decrease was primarily attributed to higher SG&A as well as increased early pay discounts.
Net income gap measure, which excludes the one time <unk> increased 12% to $3.1 million.72 per diluted share compared to $248 million or 63 cents per diluted share the year ago period.
Adjusted EBITDA in the second quarter increased 4% $4.7 billion compared to 445 billion.
Increase was driven by organic growth from both new and existing vendors, partially offset by investments made in our infrastructure and costs associated with our acquisition Spinnaker August of 2022.
Adjusted EBITDA as a percentage of gross profit or effective margin was 34.1 per cent compared to 35.8% a year ago period or.
Are effective margin and drive through for impacted by radius and a four mentioned increased customer early <unk>.
Before diving into our liquidity position I'd like to touch on a new credit facility, we close with J P. Morgan Chase Bank.
Five year security revolving credit facility is a borrowing capacity of up to $50 million and then according feature to increase the size of the facility up to $70 million.
This facility replaced our previous $20 million per line of credit with Citibank, which was set to expire in June of this year.
Under the new agreement the interest rate is based on adjusted terms Sofa, plus 1.5 to 175 per cent spread.
We look forward to working with the J P. M. C team as we now have additional capital and flexibility to fund our growth and execute on our strategic initiatives in the years ahead.
To our balance sheet cash and cash equivalents for 43.9 million June 30th 2023, compared to $20.2 million on December 31st 2022.
Working capital increased by 3.4 million during this period the.
The increase in cash was primarily attributed to the timing of receivables collections and vendor payments.
As of June 30th 2023.
1.6 million of outstanding debt.
From the turmoil that be closed in April of 22.
Which the procedure used to find certain capital expenditures.
No borrowings outstanding under our new $50 million revolving credit facility with J P. M C.
Subsequent to code Red and consistent with prior quarters, Our board of directors declared on August 1st 2000, twenty-three accordingly dividend.
One seven cents per share of our common side table on August 18th 2023 shareholders of record as of August 14th 2023.
Echo Dale's point earlier, we will continue to utilize a robust liquidity position to evaluate emanate opportunities, both domestically and abroad to enhance our services and solutions offerings across existing and future Geography's Wheeler.
We look forward to executing our organic and ordered it organic objectives and delivering another period of strong results in the back half of 2023 and beyond.
In summary.
We are proud of the effort of our global change generate another quarter of double digit growth in a G b and operating EPS, which excludes the one time stock right.
The style of concludes our prepared remarks will open it up for questions from those participating in the call. Thank you and now back to you operator.
Thank you.
Into our listeners how sad reminder, to ask a question simply <unk> one one on your telephone you will hear and Netflix advising your hand. This race to withdraw the question simply press start one one again.
One moment, while we compiled a key and a roster.
Our first question is from Vincent <unk> with the Barrington Research. Please proceed.
Yes. Good morning, guys Uhm Dale curious are you seeing any changes in the demand backdrop from last quarter to two <unk> two current to the current period.
In particular, you're seeing any pushback on pricing changes in sales cycles.
You wanted to do too.
I'm sorry, yeah from Q1 to Q too. So we we haven't really seen that we've seen some of our competitors. You know that are more hardware consent centered our center that you know they they seem a little slow down as people with you know stop buying as much hardware, but uhm, we haven't really seen that we haven't seen.
It from our vendors, we have seen some consolidation of benders not going with as many distributor. So the trimming that and we've been fortunate enough to to make it through those because they're looking at a broad line and then somebody that's much more strategic and <unk> typically set that and there's not a lot of competition on the strategic side. So I haven't seen really.
Prozac.
And are you seeing strength in the same technology segments as the prior quarter any any changes there. We are I mean, we're seeing a little slow down in the data set aside but we are you know heavy security. If you look at our you know, we we put it out and a lot of our marketing you know we have.
Excuse me six segments, we focus on security being on one of the biggest ones a lot of our vendors are all claiming security and now we're starting to see the the of course, the AI terms.
Uhm propagate into much of their a marketing.
Slips and what they're promoting but haven't and we're continually looking for Jason markets that are outside of our normal six categories to say Hey, This is something we should really start diving into and we've got some that will probably announced in Q3 two four.
And did the growth of the top 20 vendors grow in line with the business any exceptions there.
Very very consistent in terms of the vendor mixing our top 20, we've got some new emerging vendors that are starting to chip away at the top 20, <unk>. We expect that that will makes a top 20 will shift slightly as we get to the end of the year and move into 2024.
Vince if you look at some of the vendors.
You look at some of the sizes.
A lot of times, you'll see a vendor that's you know and that you know they've already has 20 30 million they around much in revenue, but now we have a couple of vendors. We've signed there and you know three 400 million dollar range and they're really you know accepting distribution as their go to market have you seen a lot of the technology companies you just being a little cautious with the with the economy. So they're trimming.
Just putting more leverage or expecting more from the channel, which is a good thing for us.
And lastly on the acquisition side I valuations continue to improve and if so does that make you more feel better about getting something done here in the near term.
If you look at you know some of the targets it varies because if it's overseas the margins are typically higher so the the.
Multiples are typically they're looking for a higher multiple I think some of those are soft and a little bit not not drastic I haven't seen a big change in that.
Okay I'll go back in the queue. Thanks, guys. Thanks, Sir.
Thank you one moment for our next question. Please.
Next question comes from the line of how <unk>. Please proceed.
Good morning, Dale Andrew can you hear me. Okay. You sure can sure so <unk> I'm a quarter and continue to progress I got three questions. If you went fine. This morning, one more for drew Army S G and a.
So the jump up year over year was about 3.7 million and I understand that the 1.8 million was at one time stock Grant, which hopefully the board doesn't do that again it level load that going forward. So we don't have that issue but.
But that.
Then there is 400000 I think you said true which was disease. One time professional service fees that you mentioned in the press release, So that's 2.2.
But then there's another 1.5 year over year, but then.
If I'm looking sequentially just went up from 10.3 million to 11.6, which is a 1.3 million increase which isn't even in the amount of the stock rant and certainly not that included so.
Can you give me a little hit me a level loaded that what what do you expect the Q3 or level loaded in queue to what's the appropriate number of SG&A as we're looking forward 100 dollar amount.
Yeah on a dollar amount so what part of that.
Between the prior year Q in this queue was a variable component commissions. So if you looked at a G b compared to a quarter over quarter commissions or commensurately increased so we add a variable cop expense, but probably about 500000.
Plus an incremental commission expense associated with you three excuse me Q2 of 2023, and then we had some payroll related expense associated with tales Grant that obviously is not will not reoccur in the prior such before that was about 150, K give or take.
So I think on a on a level set basis, you'll see us pull back to a level that's gonna be probably.
Closer to 10 million $10.2 million.
Okay, great Yeah, So a few.
Take the 2.2 off at 11.6, that's what the iced tea and it would have been for that level of adjusted gross billings Howard I want to add to that though you know so we're gonna be opportunistic and sometimes we.
Think of the whole field of dreams, if you build it they will come sometimes we have to build into what the benders are asking if they want us to take over the renewals bought from <unk> you know <unk>.
You know start investing in our team members to do that and we've done a separate renewal team and we've had to add to that so it will be opportunistic as they're starting to push more things offer offer their plate and into the channel of course, we get paid for that but he usually it's a little lagging. So we are going to be and do that you know so I don't I don't want to say this is going to be perfect.
<unk> two vendors come in and say Hey, we want you to do this this and this and <unk>. We want you to run our incumbency program you know that we don't want to run and we don't want to have it. Another one of your competitors. So it's gonna be that some ebbs and flows but not the not the level.
Yeah, and Howard <unk>, even though we don't provide granular guidance. So detailed guidance on a quarterly basis I can tell you that from our internal perspective are operating expense was spot on with our internal expectations and part of that is increase headcount.
<unk>, we acquired spinnaker last year, we brought on some additional head count that was not reflected in Q2 of 2022. So I think 10, plus spinnaker employees seven or eight of those folks remained with us, including obviously Gerard is the.
Chief revenue officer over to me and now I'm still running some significant bender opportunities. There. So so we do have some built in headcount increases that we expected and plan for it. So that's part of the year over year change it SG&A as well.
Okay Fair enough. The second question on adjusted gross Billings, I mean, a nice increase year over year up $33 million or 14%, but if I look from quarter wanted a quarter to it's down $32 million I'm not you know sequentially that wasn't a quarter you know I would expect to four down Q1, maybe but is there a sequential aspect of that or what <unk>.
Actually on that dropping adjusted gross billings, what what what you're seeing there and what are you kind of go Yep Yep Howard So again.
We we were on target with our own internal expectations. What happened in Q1 was a significant vast transaction that landed in Q1 that didn't expect Q2 spinnaker didn't quite perform at the same level vast opportunities got pushed out because of some data center delays over.
Western Europe data center builds both new construction and expansion slowed down through the economic headwinds over Western Europe .
Interest rates, obviously grows so a lot of data center owner operators slowed down some of their process, which therefore slowed down some of the vast opportunities that we have with vinegar.
Nothing's gone off the pipeline, they just moved out into the future quarters and as we indicated previously when we acquired spinnaker and it made a comment.
Each quarter, there is going to be some cyclicality or lumpiness too. The spinnaker acquisition. We're gonna have some really strong quarters. We're gonna have some ebbs and flows and <unk> just because longer sales cycles for some of the vendor products like deep instinct and fast, but they are much larger and in size and much higher margins.
So we believe that once we get into probably a normalised run right into 2024 beyond with.
Some of those vendors like bass.
Data center related vendors that will get more consistency quarter after quarter, but there's gonna be a little bit of.
Lumpiness slash rollercoaster over the next several quarters.
Okay and.
And then my last question kind of related areas on on forward guidance I noticed you don't give it right you know at what point, where you start at least giving next quarter guidance or some longterm targets. You know it's kind of the same question every call. It's like what do you. What do you see where are you in this market where are you in the revenue ramp is this linear.
Here's here's just starting his is starting to I need acquisitions too to keep the growth going it'd be just helpful to kind of get your take on it in this call and then going forward to get more quickly guidance or at least longterm targets for you. So we can kind of judge where this company's tattered. So what did you say what kind of where you are right now and so yeah.
<unk> I think the best thing you know we were just won't give you know detail guys were not at that stage right now that we feel comfortable with that but I can tell you. We can just talk about the industry in general General what we actually see and you know I think that anybody this phones for awhile has noticed you know the consolidation in the in the North American market has happened and distribution as far as acquisitions.
The European market, you know that is our target and that is really our greenfield if we're gonna be going after so that we see a lot of targets over there. So that's on the acquisition front, there's plenty of <unk>, it's almost as many [laughter] target, but I talk about <unk> talks about with emerging vendors.
Still think you need to look at us from the vendors, we sign and if you look at some of the names of course, you know unless you're super deep into the technology field. You don't you never heard of some of these names, but if you go to Crunch base, where you actually look into what they're actually doing and how how they're growing we believe we should grow and continue to grow organically in at 10 15 per cent range, because that's what I'm.
Emerging benders grow it they don't grow at G. D. P, where you know an established vendor groza unless they're you know acquiring companies. So you know that's our our our broadline competitors are growing at that you know for 3% to 4% UDP range or not growing at all so that's what we focus is in Israel team. That's what we see and that's what we're going to confirm it continually trying to drive too is that.
That emerging vendor as we get more stablish vendors, yeah, we will see some slow down because they become a larger piece of at the margins contempt a little bit and you know process, but we we still consider some of our top vendors as emerging because they're still you know so 1 billion dollar companies.
Okay Fair.
Fair enough.
Every quarter, just you know the more you give guidance in perspective.
<unk> whatever you can do especially in your next year, so I'm going to help the more helpful. It is for us to see what's going on and where we're headed.
Sam Nice order again, great jobs continue good work and hope things continue.
Howard.
Thank you one moment for our next question.
Alright, we have that <unk> file a lot from Barrington Research. Please proceed.
Yeah, Yeah, you just cited that 10% to 15% growth number for the type of client you work with would you say that's.
Sorted the level, they're on target for this year.
Yeah, I mean, that's.
That's what we look at individual vendors you know that we do I'm not I don't Wanna be held to the overall global peace of if you look at our vendor mix that is you know, we're we're trying to grow at and there's some things that come out is like like I said, we're opportunistic on some of our expenses when we have the the buildings for a quarter and saying Hey, we have to have this team.
But yeah, that's that's our goal, let's put it that way.
<unk> I would've state of this earlier as well.
And I understand the market's need and investors need for perhaps a little more guidance along the way, but we're in this for the long game, we're not focused on quarter to quarter is Dale said, we're gonna be opportunistic open our organic growth in organic investments as well as our acquisition opportunities.
Which that pipeline is fairly robust, but I I would say that we're we're comfortable that are adjusted gross billings will continue to have a low double digit growth quarter to quarter may be.
But overall over the next several years, we're very confident.
It will grow this business at the same rate as our vendor population grows.
Okay.
And yeah, one last one should we continue to expect you to add approximately three vendors each quarter does that sort of the game plan.
No not really.
What we actually see and when when they're ready to go some of them of course, we want.
<unk> <unk> <unk>, sorry about signing them in there and finding out where they're going and you're setting up their for their panel structure.
But yeah, I mean, sometimes it's gonna be a couple of sometimes it might be five we're we're trying to trim, but we still continued to trim, we'd be talking about who we add we really don't talk about what which room. So we push a lot of vendors over to climb elevate which is now over 500 vendors.
They actually transact, but it takes it out of the corps climb business. So it doesn't get marketing dollars spent on it it doesn't get any really focus so there's nothing there other than that the transaction all in the system connection to our customer. So we will continue to do that we've also launched climb elevated over in the U K.
So they're doing the same thing over there will get more efficient and then with our <unk> coming on line will all be talking to your exact same wine, which will make it a little easier for us.
Okay. Thank you.
Excellent.
Thank you for your questions I will pass it back to death Foster first final remarks.
I grew out Burger anyway, Thank you to the shareholders and thank you to see.
<unk> the coin team globally, we're gonna continue to deliver.
Deliver on a coordination of the company and I look forward to talking to your next quarter.
Thank you and this does conclude your conference you mail disconnect. Thank you.
Mmm.
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Okay.
Okay.
Okay.
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