Q2 2024 Climb Global Solutions Inc Earnings Call

Unknown Attendee: To all sites on hold, we appreciate your patience and ask that you please continue to stand by.

Speaker Change: ♪♪ ♪♪ ♪♪

Speaker Change: Good morning everyone and thank you for participating in today's conference call to discuss Climb Global Solutions financial results for the second quarter ended June 30, 2024.

Speaker Change: Joining us today are Climb's CEO , Mr. Dale Foster, the company's CFO , Mr. Drew Clark, and the company's investor relations advisor, Mr. Sean Mansouri with Elevate IR.

Speaker Change: By now, everyone should have access to the second quarter 2024 earnings press release, which was issued yesterday afternoon at approximately 4.05 p.m. Eastern Time.

Speaker Change: Solutions. The release is available in the Investor Relations section of Climb Global Solutions website at www.climbglobalsolutions.com. This call will also be available for webcast replay on the company's website.

Speaker Change: 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.

Unknown Attendee: Our presentation also includes certain non-GAAP financial measures, including adjusted gross billings, adjusted EBITDA, adjusted net income and EPS, and effective margin, as supplemental measures of our performance in our business. You'll find reconciliation charts and other important information in the earnings press release and Form 8K we filed with the SEC yesterday.

Speaker Change: 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 8K we furnished to the SEC yesterday.

Speaker Change: Thank you, Sean, and good morning, everyone.

Speaker Change: We continue to grow organically by deepening relationships with existing partners, signing new emerging technology vendors to our line card, and delivering on our acquisition goals.

Dale Foster: As we have often emphasized, our commitment to a focused vendor line card enables us to partner with the most innovative technology companies in the market. During the second quarter, we evaluated 31 new brands and signed agreements with only three of them. Let me briefly highlight a couple of these wins.

Speaker Change: As we have often emphasized, our commitment to a focused vendor line card enables us to partner with the most innovative technology companies in the market. During the second quarter, we evaluated 31 new brands and signed agreements with only three of them. Let me briefly highlight a couple of these wins.

Dale Foster: First, we launch AutoMox, a leading cloud-native IoT automation endpoint management solution to our North American partners. With the addition of AutoMox, Climb can provide customers with the capabilities to save time, eliminate risk, and automate the patching, configuration, and control of all Windows, macOS, and Linux endpoint systems with one modern IT platform. Last month, we announced an expansion of our GSA IT70 contract with the addition of Wasabi Technologies, a market leader in hot cloud storage.

Speaker Change: A Leading Cloud Native IoT Automation Endpoint.

Dale Foster: Wasabi delivers low cost, high performance, secure cloud objective storage for customers that require an in-depth defense approach to data protection. Climb will also offer Wasabi Surveillance Cloud on our GSA contract, which enables organizations to cost-effectively scale and protect video surveillance footage in the cloud. Wasabi's layered approach to data security ensures customers' data is protected by physical and logical elements that meet or exceed critical compliance requirements.

Speaker Change: A market leader in hot cloud storage, Wasabi delivers low-cost, high-performance, secure cloud objective storage for customers that require in-depth defense approach to data protection.

Dale Foster: We're pleased to offer our partners in the public sector this innovative solution and look forward to adding further depth to our GSA contract in the future. The implementation of the new system represents a major step forward in our ability to drive operational efficiencies, improve decision-making, and support our continued growth across our global operation, particularly with new acquisitions that we will onboard to our platform. I would like to personally thank Vita Ligurtali, our CTO, and his entire team that took on this project from the concept phase to a working system, and this will only enhance our competitiveness in the market.

Speaker Change: This acquisition brings more than 20 new vendor partners to Climb, including Adobe, GoGuardian, and IncidentIQ.

Speaker Change: DSS is a proven leader in the education technology channel and provides services to more than 500 value-added resellers and 250 campus stores across North America in both K-12 and higher education markets.

Chuck: As I have stated before, the culture and go-to-market strategies we have created at Climb set us apart in the market. Getting to know Chuck over the past 18 months solidifies this belief as Chuck and his team have built an excellent company that has similar core values and go-to-market plans as we do here at Climb.

Speaker Change: I would like to personally thank Vita Libertale, our CTO, and his entire team that took on this project from the concept phase to a working system, and this will only enhance our competitiveness in the market.

Dale Foster: As we enter the back half of the year, our solid foundation will enable us to continue driving strong organic growth while further improving operating leverage through the recent implementation of our ERP system. As we move into 2025, we anticipate the increased amortization expense associated with the ERP system will be offset through planned operating synergies in our platform.

Speaker Change: As we enter the back half of the year, our solid foundation will enable us to continue driving strong organic growth while further improving operating leverage through the recent implementation of our ERP system.

Speaker Change: As we move into 2025, we anticipate the increased amortization expense associated with ERP will be offset through planned operating synergies in our platform.

Speaker Change: With a strong balance sheet and robust pipeline of M&A targets, we can be patient and selective as we pursue acquisitions that will not only bolster our service and solution offerings, but align with our culture and strategic goals.

Unknown Attendee: A quick reminder as we review the financial results for our second quarter; all comparisons and variance commentary refer to the prior year quarter unless otherwise specified. As reported in our earnings press release, Adjusted Gross Billings, or AGB, increased 31% to $359.8 million, compared to $274.7 million in the year-ago quarter. Net sales in the second quarter of 2024 increased 13% to 92.1 million compared to 81.7 million, which reflects organic growth from new and existing vendors, as well as a contribution from our acquisition of data solutions in October of last year. Thus, excluding data solutions, AGB increased by 53.5 million, or 19.5% for the quarter on an organic basis.

Unknown Attendee: In the second quarter, we had an increase in the sale of security, maintenance, and cloud products, which are recorded net of related costs of sales, and therefore leads to a larger adjustment from AGB to net sales. Net income in the second quarter of 2024 increased more than 2x to $3.4 million or $0.75 per diluted share compared to $1.4 million or $0.31 per diluted share for the comparable period in 2023. Adjusted net income increased 19% to $3.8 million, or $0.83 per diluted share, compared to $3.2 million, or $0.72 per diluted share, for the year-ago period.

Speaker Change: As reported in our earnings press release, Adjusted Gross Billings, or AGB, increased 31% to $359.8 million, compared to $274.7 million in the year-ago quarter.

Speaker Change: Net sales in the second quarter of 2024 increased 13% to 92.1 million compared to 81.7 million, which reflects organic growth from new and existing vendors, as well as a contribution from our acquisition of data solutions in October of last year.

Speaker Change: So, excluding data solutions, AGB increased by 53.5 million, or 19.5% for the quarter on an organic basis.

Speaker Change: Data solutions and our solutions business generate a higher adjustment to AGB to net sales.

Speaker Change: The company's earnings per diluted share in the second quarter of 2024 were negatively impacted by 3 cents in FX compared to the prior year quarter.

Speaker Change: Adjusted EBITDA in the second quarter increased 48% to 6.9 million compared to 4.7 million in the prior period. The increase was primarily driven by the aforementioned organic growth from both new and existing vendors as well as the contribution from data solutions.

Speaker Change: Suggested EBITDA as a percentage of gross profit or effective margin increased 310 basis points to 37.3% compared to 34.2% in the year ago period.

Unknown Attendee: Cash and cash equivalents were $48.4 million as of June 30, 2024, compared to $36.3 million on December 31, 2023, while working capital increased by $2.8 million during this period. The increase in cash was primarily attributed to Data Solutions' cash balance as well as the timing of receivable collections and vendor payments. In addition, we terminated the invoice discounting facility that Data Solutions utilized as a short-term financing vehicle for working capital.

Speaker Change: Turning to our balance sheet.

Speaker Change: The increase in cash was primarily attributed to data solutions cash balance, as well as the timing of receivable collections and vendor payments.

Speaker Change: As of June 30, 2024, we had $1.0 million of outstanding debt with no borrowings outstanding under our $50 million revolving credit facility with JPMorgan Chase.

Speaker Change: As of August 6th, consistent with prior quarters, our board of directors declared a quarterly dividend of 17 cents per share of common stock to shareholders of record as of August 16th and payable on August 22nd, 2024.

Unknown Attendee: Building on Dale's earlier comments, we plan to continue driving organic growth with existing partners while adding new innovative vendors to our line card. We will also remain diligent in our M&A approach as we evaluate targets that will be accretive to earnings and fit our strategic direction. DSS is another example of delivering on our commitment to be good stewards of the capital we've been entrusted with. Our expectation is to expand DSS's top line, implement operating expense synergies in the first three to four months post-closing, and therefore grow EBITDA.

Speaker Change: DSS is another example of delivering on our commitment to be good stewards of the capital we've been entrusted with.

Speaker Change: As noted in our press release, DSS generated $5.3 million in EBITDA for the trailing 12 months ended June 30th.

Speaker Change: Our expectation is to expand DSS's top line, implement operating expense synergies in the first three to four months post-closing, and therefore grow EBITDA.

Unknown Attendee: We believe these initiatives, coupled with our robust liquidity position, will enable us to deliver strong growth and profitability in the second half of 2024 and beyond. This concludes our prepared remarks. We'll now open it up for questions from those participating in the call. Operator, back to you.

Speaker Change: This concludes our prepared remarks. We'll now open it up for questions from those participating in the call. Operator, back to you.

Speaker Change: Thank you. And at this time, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad.

Speaker Change: You may remove yourself from the queue at any time by pressing star 2.

Speaker Change: And once again, that is star one to ask a question. And we will take our first question from Vincent Colicchio.

Speaker Change: Please go ahead.

Unknown Attendee: Starting off, yeah, starting off, sounds like security.

Speaker Change: Three of our security vendors presenting there, and then the data center, you know, there's some lag there just because of the hardware, but not on our side, because we're, it's, you know, very focused. They get the hardware from different places, but it's really on the software side that we're delivering on.

Speaker Change: And it was growth broad-based, did your top 20 vendors grow in line with your world business?

Unknown Attendee: Yeah, we saw it across all of our regions as far as growth is concerned. We have self-defined territories in the U.S., and the teams there can sell any products in our line card and our top 100 that we talk about. And we had growth in Q2 in every territory, all of our DMRs, the direct marketers like at CDW-SHI, except for one, I think that was more flat. But other than that, growth all the way across.

Speaker Change: Self-Defined Territories in the U.S. and the teams that are concerned.

Unknown Attendee: And then, on the DSS acquisition, how long do you think it should take before you generate cross-selling synergies here?

Speaker Change: And then on the DSS acquisition, how long do you think it should take before you generate cross-selling synergies here?

Speaker Change: It'll be pretty quick. I mean, you know, we don't, we didn't really spell it out, but I mean, they, they lead with Adobe because Adobe is so strong in that K through 12 and higher ed space. And we have, so we talk to, you know, we, we,

Speaker Change: and we were selling to something like 15,000.

Speaker Change: locations, you know, unique locations in that space, even though we don't call it out as a vertical.

Unknown Attendee: Did you achieve your cross-selling synergies targets in the quarter?

Speaker Change: And then on the data solution side, did you achieve your cross-selling synergies in the quarter?

Speaker Change: Yeah, two things there. One is the cross-selling synergy. The other side of it is getting our teams aligned between the two groups.

Speaker Change: And we have different heads of both our original acquisition with CDF and Spinnaker and now Data Solutions. Those three, we have different team members running different aspects of the business. So as far as integration of the teams, that is all done.

Speaker Change: I can name two or three of them that actually have moved over and that we have some success with, so it'll just continue to be an organic.

Speaker Change: Flow, and most of the time it's from the U.S. to the U.K., but like I mentioned in Q1, we've had a couple that have come back this way that we actually signed in the U.S. after they were signed in the U.K. or Ireland.

Unknown Attendee: Okay, thanks for that and a nice quarter. I'll go back in the queue.

Speaker Change: Okay, thanks for that, and a nice quarter. I'll go back in the queue.

Operator: Our next question will come from Bill Dezellem with Teton Capital. Please go ahead.

Vince: Thanks, Vince.

Speaker Change: Our next question will come from Bill Dezellem with Teton Capital. Please go ahead.

Bill DeZellum: Thank you. Did you mention, Dale, that you've been in discussions for 18 months with Douglas Stewart?

Dale: Yeah, and I, you know, any of the prospects and Bill, we talked about the targets that are out there and some of the

Speaker Change: Excitement that we have as far as our growth organically is how many vendors are out there that we continue to look at and you can see this quarter looked at over 30 vendors.

Speaker Change: I was talking, I was with Charles yesterday, our CMO, and he's looked at 210, I think, in the last, you know, eight months. There's that many coming out. And the same thing on the targets of acquisitions.

Speaker Change: Most of them were overseas. We're looking at Western Europe first.

Speaker Change: But this is one that Drew introduced us to, and we started chatting, and I knew of Douglas Stewart in my past life.

Speaker Change: But the closer we got to them, I'm like, this is such a great fit for us. They do a vertical into the education space when we don't really call out verticals, you know, we, we consider our vertical is, is emerging tech and getting into the market when they actually have emerging tech.

Speaker Change: and they go into the education space and you can say well Adobe is not emerging but a lot of the products and cross-sellable products that we think we can sell around Adobe and build like a cottage industry that's that's really with the excitement of them but yeah we've been talking for quite a while.

Bill Dezellem: and Thank you for that. And would you please detail the earn out tied to this acquisition?

Speaker Change: two elements. The primary element is a gross profit margin target.

Speaker Change: DSS to generate and they have several target levels that can get to 85 percent, 100 percent, 115 percent of an earn out if they achieve those gross profit margin targets.

Bill Dezellem: Thanks, Drew. And what's the total dollar amount that that earn out could be? What's the maximum?

Bill Dezellem: Okay, thank you. And congratulations on the transaction. Relative to the ERP implementation, was that in the U.S. only, or was that across all geographies?

Dale Foster: I'll let Drew talk about that, but we're launching, our team is in the UK right now as our second launch, and then we have the other one coming up, but go ahead Drew. This is Drew's baby; he and his team have done a great job on this one.

Speaker Change: We will go live in Ireland August 5th, and then from December .

Speaker Change: Great, thank you and congratulations on a solid quarter.

Speaker Change: Our next question will come from Howard Root, a private investor.

Unknown Attendee: Good morning, Dale. Congratulations to you and the entire Climb team. Just an outstanding quarter, and this looks like, I think, maybe your best acquisition yet. We'll see the results, but congratulations on that.

Howard Root: Good morning, Dale. Congratulations to you and the entire Climb team. Just an outstanding quarter, and this looks like probably, I think, maybe your best acquisition yet. We'll see the results, but congrats on that.

Dale Foster: Two questions for me. First, kind of little things on the DSS acquisition. Is it about, and maybe I missed this, is it about the same gross margins? Is there anything different in the gross margins or the adjusted gross billings in this business than your existing business, kind of on a global or on an overall basis?

Dale Foster: It's very similar. You know, they have some different rebate structure, but because they have a limited number of vendors, so the rebates will show a little bit more than ours, even though we have vendors that have similar rebates and how we get paid. They have funded heads, like we have funded heads with our vendor manager team. So, if you look at them, they're kind of a micro climb, and they're focused, like I said, on the K-12 sled, non-profit space.

Speaker Change: It's very similar. You know, they have some different rebate structure, but because they have a limited number of vendors, so the rebates will show a little bit more than ours, even though we have vendors that have similar, you know, rebates and how we get paid.

Speaker Change: They have funded heads like we have funded heads with our vendor manager team. So, if you look at them, they're kind of a micro climb, and they're focused, like I said, in the K through 12 sled and

Dale Foster: So, you know, we pick up some great team members, you know, as we look and say, wow, these are people that already do the same thing that we do, have a lot of the same mindsets with their vendors, you know, as they go to market. So, you'll see us amalgamate our teams over the next six months. They have some territory, they don't have a lot of field representation, and it's similar to, you know, what was before Climb Lifeboat arrived here. And our teams will add that to them right off the bat. So, they'll all get paid for that stuff as they take their products to market.

Speaker Change: Nonprofit space. So, you know, we pick up some great team members, you know, as we look and say, wow, this is, this is people that already

Speaker Change: do the same thing that we do, have a lot of the same mindsets with their vendors as they go to market. So you'll see us amalgamate our teams over the next six months.

Dale Foster: Okay. And as I look at the number you gave me, it's a little over $5 million in adjusted EBITDA for the trailing 12 months, which looks to me like maybe a little bit around 20% of the climb. Is this about a 20% add to your bottom line? Is it immediately accretive in that way, or how do you look at it going forward in terms of percentage? It's immediately accretive to what we're doing, and they run a very lean team, 36 employees, similar to our data solutions in Ireland, which are extremely lean. They had a leading vendor of Citrix, and this is a leader with Adobe.

Speaker Change: Okay. And as I look at the number you gave me, it's a little over $5 million in adjusted EBITDA for the trailing 12 months.

Speaker Change: which looks to me like maybe a little bit around 20% of...

Speaker Change: How do you look at it going forward in terms of percentage? It's immediately creative to what we're doing. And they run a very lean team, 36 employees. Similar to our data solutions in Ireland, extremely lean. They had a leading vendor of Citrix, and this is a leading with Adobe. But right off the bat, you'll see the results in Q3.

Dale Foster: But right off the bat, you'll see the results in Q3. Go ahead. Okay. All right. Great.

Unknown Attendee: Then, you know, my other question, kind of, as I always ask, is looking at the future of the business. I mean, a 31% increase in adjusted gross billings, but admittedly, you know, the second quarter last year wasn't a great quarter. So it was a pretty easy comp for you, but still growing mid-double digit growth in really what I look at as terms of revenue and increasing leverage to the bottom line. And now, you know, congrats, maybe early congrats, but congrats so far on your ERP implementation.

Speaker Change: Unknown Speaker Okay. All right. Great. Then, you know, my other question kind of, as I always ask is looking at the future with the business. I mean,

Speaker Change: 31% increase in adjusted gross billings, but admittedly, you know, second quarter last year wasn't a great quarter, so it was a pretty easy comp for you, but still growing mid-double-digit.

Speaker Change: Growth in, in really what I look at is in terms of revenue and increasing leverage to the bottom line and now, you know, congrats, maybe early congrats, but congrats so far on your ERP.

Unknown Attendee: Because that's a big obstacle with, I don't see anything else. I'm not hearing anything else big in terms of added expenses coming in down the pipeline, which means more drops to the bottom line. And with a strong market for your products, do you see anything reducing the kind of linear increase that you've had in your top line and a little bit better than that increase to your bottom line as we look forward? I just want to give you an opportunity to talk a little bit about the future without giving any specific guidance.

Speaker Change: Implementation, because that's a big obstacle with.

Speaker Change: Yeah, and let me talk, I think maybe jump into some of the macro stuff, because we track, both customers we sell to that are, they're very large and they're public companies and also some of our competitors that are extremely large.

Speaker Change: and we, I think some people try to put us in those buckets, and we don't seem to track where they're tracking because they have such a hardware component of their overall sales.

Speaker Change: servers, but they still continue to buy security, and that is our leader.

Speaker Change: on that side. So we don't, we have not followed that trend of, you know, some of the companies that reported last week.

Speaker Change: So if we're not selling in one discipline, we'll start looking in the other. Our teams are highly compensated on gross profit.

Speaker Change: and we'll just keep fine-tuning our model. But the other thing is we're still extremely small to the market that we've...

Speaker Change: we sell into. So we can just change rapidly and we keep our ear to the ground as far as, hey, do we need to make some changes here? We talk about it continually. And we have both sides of it, right, the vendor side and then the, like I said before, the acquisition side.

Operator: And that will conclude our question and answer session. I would now like to turn the call back to Mr. Dale Foster for his closing remarks.

Speaker Change: And this will conclude our question and answer session. I would now like to turn the call back to Mr. Dale Foster for closing remarks.

Dale Foster: Thank you, Albert. Thank you to all shareholders. In closing, I want to thank the entire Climb team.

Dale Foster: It's been, you know, we talked about ERP a couple of years ago, and we finally implemented it. And like Drew said, we'll implement it throughout our organization, and we'll be completely done by, you know, the end of this year. But the amount of hours that not only our IT team has put in, but also what we call our SMEs, our subject matter experts in each division, have put in the extra time to make sure there was a successful launch. I know a lot of people when they hear ERP, they think, wow, this is going to be a mess.

Speaker Change: It's been, you know, we talked about ERP a couple years ago, and we finally have implemented it. And like Drew said, we'll implement it through all our organization and will be complete by, you know, the end of this year. But the amount of hours that not only our IT team has put in, but also

Speaker Change: What we call our SMEs are our subject matter experts in each division have put in those extra time to make sure there was a successful launch.

Speaker Change: I know a lot of people when they hear ERP, they think, wow, this is going to be a mess. Our team has made that a very minimal amount of mess, and we are off and running. So we will close out July as the first time on our new system. So with that, I appreciate everybody joining. Thank you.

Dale Foster: Our team has made that a very minimal amount of mess, and we are off and running. So we will close out July as the first time on our new system. So with that, I appreciate everybody joining us. Thank you.

Operator: And this will conclude today's teleconference. Ladies and gentlemen, you may now disconnect.

Speaker Change: And this will conclude today's teleconference. Ladies and gentlemen, you may now disconnect.