Climb Global Solutions, Inc.

Good morning everyone and thank you for participating in today's conference call to discuss Climb Global Solutions financial results for the third quarter ended September 30, 2024. Joining us today are Climb's CEO, Mr. Dale Foster, the company's CFO, Mr. Drew Clark, and the company's investor relation advisor, Mr. Sean Manzuri with Elevate IR. By now everyone should have access to the third quarter 2024 earnings press release, which was issued yesterday afternoon at approximately 4.05 p.m. Eastern Time. The release is available in the investor relations section of Climb Global Solutions website at .climbglobalsolutions.com. This call will also be made available for webcast replay on the company's website. For management remarks, following management remarks, we will open the floor for questions. I'd now like to turn the call over to Mr. Manzuri 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 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. 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, adjusted net income in EPS, 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 8K we furnished to the SEC yesterday. With that, I'll turn the call over to CLIMB CEO, Dale Foster.

Thank you, Sean, and good morning, everyone. Q3 marked another exceptional period of growth and profitability for CLIMB as we generated record levels across all of our key financial metrics while delivering on our acquisition objectives. Our strong performance was driven by the continued execution of our core initiatives and the integration of Douglas Stewart Software, or DSS, and Data Solutions Ireland onto our operating platforms. Also in Q3, we rebranded Data Solutions Ireland to Climb Channel Solutions with a great evening on September 5th in Dublin, sharing our launch to with CLIMB theme and the vendors and customers. Additionally, we generated double-digit organic growth in both the US and Europe as we strengthened relationships with existing partners while signing new disruptive vendors to our line card. As a brief reminder of our recent acquisition, DSS, a Wisconsin-based IT distributor that brings 20 new vendor partners to CLIMB, including Adobe, GoGuardian, and Incident IQ, to name a few, DSS is a proven leader in the education technology channel and provides products and services to more than 500 value-added resellers and over 250 campus stores across North America in both K-12 and higher education markets. We are actively identifying cross-selling opportunities and cost energies to look forward and look forward to exploring additional benefits as we further integrate DSS into our sales and operating workflows. Throughout the quarter, we worked through a robust pipeline of emerging vendors. We continue to identify and partner with the most innovative technologies in the market that align with our vendor ecosystem that solves today's most difficult IT challenges. For example, in Q3, we evaluated 29 vendors but signed agreements with only four of them. I'd like to quickly highlight one of these wins. In September, we announced a partnership with Align, a leading security and compliance solutions provider that is trusted by more than 4,000 global organizations. Align combines deep compliance expertise and innovative audit management technology to mitigate cybersecurity risk while navigating complex regulatory requirements. By partnering with Align, we are ensuring that our channel partners have the resources needed to efficiently move from audit to strategic compliance. We look forward to building a mutually beneficial relationship with Align as we continue to grow our businesses globally. On the topic of scaling overseas, we recently took our first steps toward building our presence in Germany, a key market in Western Europe. As we have stated many times, deals in Western Europe are built on trust and local connections. For the first time in the company's history, we have dedicated a team to be on the ground focused on building and nurturing these relationships. We recently completed Align branding kickoff signaling the start of a more committed and comprehensive approach in this region. We are thrilled to launch this initiative and look forward to building out Align's presence in Germany and the Dock region. As we mentioned before, we went live with our new ERP system during the quarter. While it is early with our new systems, we expect this platform to significantly enhance our operations over time, both in North America and overseas, by providing better access to real-time data across finance, sales, and other operating functions. We anticipate realizing operational efficiencies and improved decision-making capabilities to support our growth as we continue to scale our global footprint. Looking ahead, we remain focused on leveraging our global infrastructure to drive organic growth while actively exploring M&A targets that enhance our geographic footprint, broaden our service and solution offerings, and most importantly align with our high-performance culture. We anticipate unlocking additional synergies from our acquisitions and further improving operating leverage as we execute across our global platform. These initiatives, coupled with our proven track record of a creative M&A, will enable us to close out 2024 on a strong note and achieve another record year performance. With 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. Good morning, everyone. A quick reminder as we review the financial results of our third quarter. All comparisons and variance commentary refer to the prior year quarter unless otherwise specified. Furthermore, as Sean mentioned, at the start of the call, we discuss various non-GAAP operating and financial metrics as supplemental measures of the performance of our business. As reported in our earnings press release, adjusted gross billings, or AGB, increased 65% to $465.2 million compared to $281.9 million in the year-ago quarter. Net sales in the third quarter of 2024 increased 52% to $119.3 million compared to $78.5 million, which grew at a lower rate than AGB due to a greater percentage of sales recognized on a net basis in the quarter. Growth in AGB was attributed to organic growth from new and existing vendors as well as a contribution from our acquisitions of DSS on July 31 and data solutions on October 6 of last year. Data solutions and DSS combined for $81.3 million or 44% of the growth in AGB, while our core business grew by $102 million, representing 56% of the increase and -over-year growth of 36%, which was positively impacted by several vast orders in the quarter. Growth profit, or GP, in the third quarter increased 70% to $24.3 million compared to $14.3 million. Again, the increase was driven by organic growth from new and existing vendors in both North America and Europe, representing $6 million or 60% of the increase, as well as the contributions from DSS and data solutions, which represented $44 million or 40% of the growth. Growth profit as a percentage of adjusted gross billings increased to .2% compared to 5.1%. SG&A expenses in the third quarter were $13.9 million compared to $10.1 million for the same period in 2023. SG&A from DSS and data solutions accounted for $1.8 million of the increase, along with variable sales compensation attributed to the growth in AGB and the overall growth of our operations. SG&A as a percentage of AGB decreased to 3% compared to .6% in the year-ago period. Net income in the third quarter of 2024 increased more than two times to $5.5 million, or $1.19 per diluted share compared to $2.4 million, or $0.52 per diluted share for the comparable period in 2023. As referenced in our press release, net income was impacted by a $1.2 million charge related to a change in fair value of acquisition contingent consideration associated with data solutions. Adjusted net income also increased more than two times to $7.1 million, or $1.55 per diluted share compared to $2.6 million, or $0.56 per diluted share for the year-ago period. The company's earnings per diluted share in the third quarter of 2024 was negatively impacted by $0.05 in FX compared to the prior year quarter. Adjusted EBITDA in the third quarter increased 96% to $9.9 million compared to $5.1 million in the prior year quarter. The increase was driven by the aforementioned organic growth from both new and existing vendors in our core business, which represented $2.8 million, or 58% of the increase, as well as a $2 million contribution from DSS and data solutions. Adjusted EBITDA as a percentage of gross profit or effective margin increased 500 basis points to 41% compared to 36% in the year-ago period. Turning to our balance sheet, cash and cash equivalents were $22.1 million as of September 30, 2024, compared to $36.3 million on December 31, 2023, while working capital decreased by $12.3 million during the period. The decrease in cash was primarily attributed to the cash fade at closing for our acquisition of DSS of $20.9 million, as well as the normal timing of receivable collections and vendor payments. As of September 30, 2024, we had $900,000 of outstanding debt with no barrings outstanding under our $50 million revolving credit facility with JPMorgan Chase. On October 28, consistent with prior quarters, our board of directors declared a quarterly dividend of $0.17 per share of our common stock.

The

stockholders of record as of November 11, 2024 and payable on November 15, 2024. To echo Dale's earlier comments, our plans remain unchanged. Leverage our global presence to drive organic growth while expanding our line card with the most innovative companies in the market. Our strong balance sheet will continue to drive our M&A strategy as we evaluate new targets in Western Europe and beyond. We're proud of our team's hard work and dedication in achieving these record results and look forward to maintaining this momentum through the close of 2024 and into the year ahead. As Dale and I continually reinforce to our team, let's keep climbing. This concludes our prepared remarks. We'll now open it up to questions from those participating in the call. Operator, back to you.

Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. We will pause for just a moment while questions queue. Thank you. Our first question will come from Vincent Colicchio with Barrington Research. Your line is open.

Yes. Good morning, Dale. Nice quarter. Curious if your top 20 vendors grew in line with the overall business?

Yeah. I wouldn't say all 20 of them, but the core of them, that's what's really driving the growth on our organic side, Vince. It is, we still have some new entrants into the top 20. If you look at the 14 through 20, there's more of them as you go down the line curve. They'll jump up and it depends. I mean, if you look at Q3 historically heavily into the public sector space, so we'll see the vendors that are focused on that increase in that area, but nothing out of the ordinary.

I'm curious, I assume security continues to drive lead growth amongst your technology segments. I'm curious if there's any technology segments that perform better or worse than expected outside of that.

As Drew mentioned, vast data, we talked about it. It's a vendor that we signed on the UK side with the acquisition of Spinnaker and then brought it to the US. Had our first order come in, it was sizable out of North America and Canada. We're starting to see a pickup in the States. That's going to be lumpy, so you'll see that and we'll talk about that as the orders come in. Outside of that, security is still driving a lot of it. Security is now such a big swath of everybody having security in their name, whether it's backup, whether it's retention of data. They're going to do some kind of security play, but it's still that cyber security. Also, the amount of vendors that come toward us with security flair to us is out of those 29 we evaluated, probably two-thirds of them were some type of security platform or product. The ones that just have too much of an overlap, we just pass on because we've already spent the time on boarding and launching the ones we have in our portfolio.

Drew, your adjusted SG&A levels relative to the AGB were relatively efficient. Is that a sustainable level or do you plan to make investments that will bring that to more normal levels? Our goal, Vince, as

we've stated period from time to time, is that we really would like that SG&A expense level as a percentage of AGB to be in that 3% range. Part of that comes with scale and leverage, which we benefited from both data solutions and from Douglas Stewart software. We'll continue to invest in teams, whether it's renewal teams, it's additional salespeople supporting a particular vendor, markets, but again, that growth in dollars should continue to be flatter than the growth in the AGB. There'll be incremental dollar growth over time, but as a percentage, it should hopefully continue to be in that 3% range.

Will the DOC region become a priority for an acquisition?

Yeah, I've talked about it probably for the last three or four quarters. It is, and it's based on looking at a couple things. Where vendors are asking us to go from our Europe operations, Gerard Brophy runs that team, based on just the market analysis of GDP and where some of our competitors are not, so we're going to fill that void with emerging tech that we actually sell to. The big GDP market in the DOC region, we've got a great guy on the ground with Martin Bichler on the ground in Munich, and we'll just keep expanding there. He'll also help us vet through some of the potential acquisitions we're looking at and have been looking at.

Should we expect somewhat of a pause before you do another acquisition here?

Yeah, no, 2025. I mean, we've always said that it's one to two per year. We've used cash on all of our acquisitions. It really depends on the size, but if you look at what we're planning on doing, it's pretty much the same we've been doing over the last three or four years.

Yeah, I'll go back in the queue. Nice job. Thanks. Thanks, Matt.

Thank you. Once again, if you would like to ask a question, that is star one to join the queue. Our next question will come from Bill DeZellem with Titan Capital. Your line is open.

Thank you. Let me start with just a super small question. You had $609,000 of acquisition-related costs. In this quarter, did that happen to be lease terminations, severance? What were those activities, please? In terms of the VMA costs? Yeah, the $609,000. What were those costs actually for?

Predominantly, Bill, professional services associated with the transactions. We had some expense associated with Data Solutions as we wrap up their earn-out. We had carryover expenses related to Douglas Stewart Software Services, which we closed on the 31st of July, and then some ongoing investments as we continue to explore

opportunities. Great. That's helpful. As you think about future acquisitions, generally, would you anticipate that there would be much in terms of severance or closing facilities, etc., or are you really just bringing them under your umbrella and letting them run and be as efficient as they choose to be?

Yeah, and that's a good question, Bill. If we look at it, of course, every acquisition is a little different. Sometimes you have the seller staying on board. I focus on culture first, and then you take a look at their strategic fit within CLIMB, where they're going to go, what their vendors look like, and then the geographic reach to maybe a territory that we're not into. If I look at our last five acquisitions, we have some of the operators that have stayed on board, but we've never gone in and said, okay, it's the top tier of execs that are going to deal with a big severance play. The one with the data solutions in Ireland, Michael stayed on for six months and then moved on as he retired, but they're all going to be different, but I don't see a big severance play, because that wouldn't be a good fit for us. It wouldn't be a cultural if we're going to go in and just take, I guess, the core part of the business and not have the people that are running it, because we don't want to run a company in Germany. We want to have a culture that fits with ours that we can just continue to expand on what we're doing. They can see from our original plan of us acquiring and expanding as we think technology starts in North America and moves through the rest of the globe, so we want to be able to launch it very quickly there and just use the resources of the company we acquired.

Dale, that's very helpful. Do you find in your acquisition process that that mindset ends up being an advantage and that you end up closing more deals because the seller likes that approach as opposed to a fear or a knowledge that there will just be a gutting of the people part of the organization?

Yeah, here's my, and I'm super open with the potential target, and some of the team members that are still with us from our first acquisition, Carlos runs our North American vendor management team, and we acquired them in 2020 part of Interwork acquisition. I said, listen, just reach out to my three or four people that are still with us of acquired companies and let them tell you, I don't want to be on the call. You explain what your experience was when QIIME acquired you, what the experience for your team members, what actually happened. But the ones that we're targeting, and I'll take DSS out of it because of North America and it was a little different because we wanted to get into a K-12 and higher ed market and really start a state and local practice. But the rest of them in Europe, if you look and you ask, okay, what is your number one challenge? And the number one challenge is getting to sign vendors because you have to pretty much come to the states, build relationships with wherever these vendors are located, of course most of them along the Silicon Valley and the Northeast. You have to build them and then convince them that you can actually sell into your region in Europe and beyond. So that's the number one challenge. And if that's the number one challenge, we already have like a business fit because we launched in North America with a global contract and we can take it into their sales team. What do salespeople want? They want more things to sell. So that's pretty much across the board of the companies that were acquired in Europe.

Great. That's very helpful. And then historically, the fourth quarter has been meaningfully stronger than any other quarter of the year. Is there anything about this year that you think will make that different or would it be reasonable to assume the fourth quarter will be meaningfully larger than I guess it would be this quarter since this is your largest quarter of the year so far? Yeah, the fourth quarter

is because just history, right? In the company, people are extinguishing budgets. People are renewing their licenses going into the new year. You'll see Douglas Stewart, if you look at their Q1 is usually one of their lighter quarters as they're building up to the education market, which 48 of the states end their fiscal year June 30th. So you see that they're building up what people are going to buy and then they'll pick up their best four months or June, July through November or October. So Q4 is going to be strong as well. We get to see the renewals that are coming up or they're not going to be renewed. And like we say, most of our renewals, it's a new history for us, whether it's a SAS model or it's reoccurring on the licensing. So we don't see anything different than that. We just have a lot of momentum going into Q4. I'll be honest with you, we're still struggling with our ERP. Our efficiencies are not where we want them to be. And everybody probably rolls their eyes and says, yeah, we've been there and done that. Our team has done a great job. We think we'll get to our operational efficiency by the end of this quarter to go into 2025 almost on the same page. The good thing is all of our companies are on ERP outside of Douglas, Stewart and they'll be on by the end of the year. Great.

Thank you. And then one additional question, please. For quite some time now, several quarters, there continues to be just general macro question of whether the market is softening, improving, holding steady, et cetera, et cetera. So would you characterize what you are seeing here in the third quarter and through October, please?

So I'll take it from the beginning of us onboarding vendors. That pipeline has been as strong as ever. Vendors come to us. And we kind of look at the vendors coming. Are they coming because they're stagnant and they just need another route to market to try something different, right? And that's not as attractive to us as a vendor that says, hey, I'm just getting ready to build out my channel practice. You guys are the emerging go-to distributor. Let's do that. So we're still seeing that part of it. The other side of it is we're in software, though. So we're not, we don't have logistic issues. We don't have, you know, this, the market's been talking about this refresh of endpoint, you know, tablets and laptops and all the other stuff that goes with it. It's supposed to happen in Q2 2024. It didn't happen. Picked up a little bit in Q3. I was at the Canalus event last week and they're talking about, you know, hey, that's going to have some recovery in Q4. It'll help us, but it hasn't hurt us because Drew famously loves to say, man, you know, people can't go without their security. They can't go without protecting their systems. They can't go without protecting their endpoints. You know, and even in the cloud, they have to be able to protect all the stuff that they have as their workflows, whether it's a hybrid workflow or it's an on-prem workflow.

And so would you characterize the macro environment as being reasonably strong then, just from your perspective along? From where we

sit in it, it's still very strong, you know, as some of it in our Q2 results, and we just don't see any downturn. And if this refresh that is supposedly coming comes, it'll only help with us because everybody will say, okay, you know what, I've got all my new laptops deployed. You know, I should really take a look and say, do I have the right product to protect me? I think we have the right protection on them. Great.

Thank you for taking all the questions. Thanks, Bill. Good talking.

Thank you. It appears we have no further questions at this time. I'll now turn the program back over to Del Foster for any additional or closing remarks.

Thank you, operator. And I just want to thank all of our stakeholders as we continue to, you know, drive the climb forward. We've continued to focus on our core, which is really the premier company to launch new emerging technologies, and that's, you know, ever-expanding as we're North America and Europe and, you know, still looking beyond that as well. So thank you all. I appreciate it.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.