Wayside Technology Group, Inc.

Good morning, everyone, and thank you for participating in today's conference call to discuss Wayside Technology Group's financial results for the second quarter ended June 30th, 2021. Joining us today are Wayside CEO, Mr. Dale Foster, the company's CFO, Mr. Drew Clark, and the company's investor relation advisor, Mr. Sean Manjuri with Elevate IR. By now, everyone should have access to the second quarter 2021 earnings press release. which was issued yesterday afternoon at approximately 4.15 p.m. Eastern Time. The release is available in the investor relations section of Wayside Technology Group's website at waysidetechnology.com. This call will also be available for webcast replay on the company's website. Following management remarks, we'll open the call for your questions. I'd now like to turn the call over to Mr. Manzori 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 and adjusted EBITDA 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 Wayside CEO Dale Foster.

Thank you, Sean, and good morning, everyone. Our strong second quarter results reflect the continued focus and execution of both organic and inorganic growth initiatives. We generated exceptional growth across all key operating and financial metrics during the quarter, along with our two acquisitions from the past year that are driving meaningful improvement in the respective geographies and vendor lines. As we've stated before, we have three core initiatives that drive everything we do. Number one, generate organic growth from existing vendors and customers. Number two, enhance our line card with addition of new emerging vendors. And number three, execute our acquisition strategy by utilizing our balance sheet and free cash flow to acquire companies that will be strategic and accretive to our earnings. Within the existing vendor network, we continue to deepen relationships with a sales and marketing focus on higher growth products. Our partners continue to recognize our unique ability to actively sell and market their products to channel customers. Spending on security and data center and cloud product lines remain all-time highs, and we plan to continue capitalizing on this market momentum by serving as an effective sales channel for our partners. The depth of our relationships is further reflected by the activity within our top customers and partners. For instance, in 2020, we generated 102 million of gross sales with our top 20 vendors. Today, we generate more than 156 million of annualized gross sales with our top 20, a 50% increase. This truly speaks to the quality of our service offerings and the value we provide to our customers and partners. Although we are pleased with our performance to drive growth within our existing network of vendors and customers, we know there is always room for improvement, and we will continue to seek opportunities to deepen these relationships. Signing up new vendors is also key to ensuring that we have the most compelling list of technologies to offer on our line cards. In Q2, we continued to execute on that front, as reflected by several new partnerships, announcements, and marquee companies like StoreOne and D2IQ. To put some numbers behind the improvements we have made, in 2020, we generated $1 million plus in net sales with about 30 different customers. Today, we generate over $1 million of sales with more than 42 customers. This is a reflection of both depth and breadth within our customer network and speaks to the proactive sales culture we have implemented across our various business units at Wayside. On the acquisition front, we continue to actively seek strategic opportunities across multiple geographies while working to drive efficiencies through scale and various operating levers in all divisions of the company. During the quarter, we rebranded CDF's Sigma software distribution business to Climb Channel Solutions, which brings together two highly respected channel brands servicing the emerging technology market. Sigma and Climb share many vendor relationships, which has made for a seamless integration process with a shared focus on driving growth and efficiencies. As you may have seen, earlier this week we launched Climb Expedition, our new cloud marketplace designed for MSPs and hybrid bars to explore and transact with vendors that are moving to a subscription-based model of software delivery. Expedition is a flexible self-service platform that enables our partners to interact more efficiently with clients' slate of technology solutions. Expedition not only benefits our customers, but also benefits our emerging vendors by extending their reach into the MSP community. I look forward to providing future updates on Expedition and how the new marketplace Speaking of the competition, the continued consolidation in our industry provides us with an even greater opportunity to separate Wayside from the pack. In the past year, several of our top players in tech distribution either merged or have been acquired, including Ingram Micro's $7 billion acquisition by Platinum Equity, as well as Cynic's merger with Tech Data, which will create a combined company that will generate $57 billion and perform annual sales. Companies like these don't offer the boots on the ground, high-tech support that we offer through our distribution and solutions. Emerging technology companies need more than simply supply chain logistics, which is the focus of most large distribution companies. For this reason, Wayside is well positioned to win and differentiate itself in this segment of the market. Before I turn the call over, I want to discuss a few key new additions to the Wayside team. First, we are thrilled to deepen our bench on the board with the addition of Jerry Gold as a director. Jerry brings nearly three decades of executive experience to the board and is currently the Senior Vice President and COO of HP Financial Services, the IT Asset Management and Financing Division of Hewlett Packard, where she oversees $13 billion in assets across more than 50 countries worldwide. We also retained a new investor relations firm, Elevate IR, to help improve our communications and awareness within the investment community. Given our improved financial profile and the strong momentum in our business, we felt the time was right to bolster our IR efforts, and we look forward to working with Elevate to engage a broader audience going forward. And finally, in June, we appointed Drew Clark as our new CFO. Drew brings an outstanding track record of driving results for both public and private companies. He most recently served as the COO of Metasol and has served on multiple public company boards, including SafeNet and Howard Bancorp. Most importantly, Drew shares our vision of creating a differentiated platform of distribution and solutions for emerging technology brands, and he has a keen understanding of the critical work and infrastructure required to take Wayside to the next level. So without further ado, I'd like to introduce everyone to Drew Clark as he takes you through our financial results. Drew?

Dale, thank you for the warm introduction, and I'm absolutely thrilled to be joining the team at such a pivotal time in the company's history. So let's jump right into our results. I'd like to note that all comparisons and variance commentary refer to the year-ago quarter unless otherwise specified. Net sales in the second quarter of 2021 increased 33% to $75.4 million compared to $56.6 million in the prior period. This reflects both strong organic growth and the benefit from the acquisition of CDF, as well as one month of incremental contribution from Interwork, which was acquired in May 2020. Excluding these acquisitions, we increased net sales by $9.8 million, or 17% year-over-year, with CDF and Interwork contributing an estimated $6.9 million and $2 million, respectively. Adjusted gross billings, a non-GAAP measure, increased 48% to $235.1 million compared to $158.7 million in the prior quarter. Again, we experienced strong organic growth of 28% or $45.2 million, with an estimated contribution of $20.9 million from CDF, and $10.3 million from Interwork, which reinforces Dale's earlier comments regarding our continued execution of both organic and inorganic growth strategies. Growth profit in the second quarter of 2021 increased to a record 54%, or $11 million compared to $7.1 million in the prior period. Again, the increase was driven by organic growth and the benefit of the CDF and Interwork acquisitions. SG&A expenses in the second quarter were $8.5 million compared to $6.4 million, with the increase primarily related to incremental costs from the operations of CDF and Interwork, as well as costs related to investments in our business that we expect will drive continued growth in the quarters and years ahead. These expenses include $2 million from CDF operations and $300,000 related to increased amortization expense, primarily attributable to our acquisition of CDF in November of 2020. 200,000 employee separation expenses were also part of this increase, and core selling expenses associated with the organic growth delivered through the gross profit increases, all of which were offset by last year's non-recurring approximately $500,000 of various expenses with the defense of the unsolicited bid and $200,000 of acquisition-related costs. As a percentage of net sales, SG&A was 11.3% compared to 11.2%. Net income in the second quarter of 2021 increased approximately four times to $2.1 million or 49 cents per diluted share compared to $600,000 or 13 cents per diluted share. Adjusted EBITDA in the second quarter increased 68% to $3.5 million compared to $2.1 million. The increase was driven by the aforementioned organic growth and acquisition benefits as well as a strong operating leverage. Effective margin defined as adjusted EBITDA as a percentage of gross profit increased 270 basis points to 32% in the second quarter of 2021 compared to 29.3% in the prior quarter. Cash and cash equivalents were $23.8 million as of June 30, 2021 compared to $29.3 million as of December 31, 2020. The expected decrease was primarily driven by timing of cash flows and is not an indication of any business or operating trend. The company remains debt-free with no borrowings outstanding under either our $20 million U.S. or 8 million pound U.K. credit facilities, both with Citibank. On August 3rd, our board of directors declared a quarterly dividend of 17 cents per share of common stock, payable on August 20th to shareholders of record on August 16th, 2021. Looking towards the balance of 2021, our strong liquidity position and our operating cash flow continues to provide us with the flexibility to execute on both our organic and acquisition growth strategies. Despite the strong results of our second quarter, we as a company still have work to do to achieve our desired levels of growth and profitability. As we look at the balance of 2021, we see ample growth opportunities to capture and look forward to achieving both our short-term and long-term goals while continuing to build meaningful long-term relationships with our customers and vendor network. This concludes our prepared remarks, so we'll now open it up for questions.

Thank you. If you have a question, please press star then 1 on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touchtone phone. And we have a question from Ed Wu. Please go ahead.

Yeah, congratulations on the quarter. My question is, what are you hearing from your enterprise customers? Do they feel that the business environment is positive? It's, uh, or are they concerned about, you know, possibly upticks on, you know, the COVID again, or, uh, you know, people in terms of running out of steam in terms of, you know, working from home and stuff.

Thanks, Ed. And I think it's the, uh, and I think we talked about a little bit, uh, in the Q2, um, when we're going into it, it's just the optimism that you feel in the marketplace from our customers, both enterprise and, uh, you know, the, the wide, um, group of resellers that we support. We definitely see it from our vendors. I think we talked about it before that, you know, we were heading back to the office. Our teams are back in on July 6th. So that's all positive. But yeah, I think there's optimism out there. We definitely see the pipeline filling up, which I think they've been dragging in the past. But, you know, we're seeing it in the actual results side of things. So that's a good thing.

Great, and my next question is in terms of M&A opportunities. Are there a lot of opportunities out there, and what are you seeing in terms of valuations? And in terms of capacity for M&A, do you guys feel that you guys are ready to take on another acquisition at this time?

Yeah, let me start with the balance sheet part of it first. I mean, we're definitely in a position financially to do that, depending on what the target looks like. We definitely can go higher upstream, as you can see, you know, that we could put some leverage on the business. But as far as targets go, you know, it's been consolidated in the U.S. You and I have talked about that in the past. There are not very many targets there. Western Europe is our focus. And, you know, I can tell you that we have, you know, quite a few on the list. We've engaged with a select group of that. And it's always going to be part of our strategy in the near future to kind of do what we did with Interwork and CDF. I mean, it was good fits for us. We'll take our time to make sure that we make the right moves, that it makes the right strategic, you know, it's the right strategic acquisition for the company of where we're going to go. And it's not going to be way outside of our lanes. You know, it's going to be in that distribution MSP services type solution. So you'll see that in the upcoming quarters when we talk about it.

Great. Well, thank you, and I wish you guys good luck.

Thanks, Ed. Appreciate it.

And as a reminder, if you have a question, there's far than one on your touchtone phone. Our next question comes from Howard Root. Please go ahead.

Good morning, and congratulations, Dale and Drew, on a great quarter. It was just wonderful results to see. My question, I have two questions. One is the cloud. You know, Dale, when you started in 2018, you really, you know, that was one of the glaring holes. You had no cloud distribution, and you started working on it. I know you had a project, and then you acquired CDF, which had the cloud platform and I think that's what you've used. But if you could talk about, is that project done? Are you satisfied with it? Is there more work to do? And what has that meant to your revenue growth?

Yeah, the project will never be done when it comes to the cloud piece of it because you'll see all the different providers, you know, whether it's a hybrid cloud or, you know, how they actually want to transact. But you're correct. I mean, we talked about it for a long time. We finally launched it with Climb Expedition. It is the underlying coding is the same one that the CDF used, and we actually were going in that direction even before we acquired them. So it was just a little more acceleration on our side. But if you look at it, we don't track it separately now because it's so new as far as the dollars go. But here's the issue, and that is vendors are moving in that direction, and they're not moving as fast as Microsoft and where Microsoft is as far as doing subscriptions on a monthly basis. they're going to get there. It might take them 18 months to get there. So as they move in that direction, you'll see our licenses and our sales go from perpetual to subscription-based. So it'll really kind of be a shift of our revenues, but we plan on capturing outside of that just new additional territories that we can go into that we couldn't go into before when there's many companies that have just born in the cloud. So it opens us up for just more vendors to look at that are just cloud vendors that we couldn't transact with. So It's really, you know, we're really new to it that way, and so is, you know, the rest of the market to be able to transact that way. So you'll see us talk about that a lot, Q3, Q4, and probably, you know, next year will be the one we start actually looking and talking about the numbers on it.

Great. So that kind of segues into my second question, which is really looking at future growth. And I think I finally, after following you for a couple of years here, finally figured out, I mean, I'm really paying attention to adjusted gross billings, which really is all of your product movement, whether it's net sales or not. And if I look at that up 48% year over year and up 12% sequentially, and you're closing in on a billion dollars in adjusted gross billings. And then I kind of take a look from that. I look at what what gross profit you do from that, and I'm looking at around 5% of that adjusted gross billings is dropping to your gross profit line. If you could talk a little bit about looking forward. That kind of growth rate just isn't sustainable in very many places when you're already at that size. What do you see as the potential? I don't want you to pin you into 48% year-over-year growth for the next five years, but What are you seeing? Are you at the beginning, middle, later stages of that kind of growth? And what's the potential market for the overall business?

Yeah, I guess if I look at the macro level, and I talked about it in the release as far as, you know, look at our next, you know, the smallest of the large competitors. You know, you have ScanSource in the billions of dollar range, and Arrow is $30 billion. So, you know, that consolidation has already happened. there's a lot of headroom for us that we can go and, you know, we tell investors, you know, we can double in size and not be effective to the market, really. I mean, we'll make it disruptive, and like we are now, we're being very disruptive to some of our competitors in certain aspects of their divisions, right, whether it's Ingram or Arrow or Cinex, tech data combination. So I'm not saying we can grow at that rate, but there's so many targets. When I say targets, there's so many vendors. So We are approaching 500 vendors that we've looked at in the last three years, and we've only signed 50. So we'll look at, you know, I mean, that's, you know, over 100 a year. We're nonstop. We have a full recruit team, and it's really about those vendors coming in. If we look at our top 20 vendors, you know, we didn't have a relationship with them 18 months ago. So there's that many coming out of the woodwork that need their products sold. The issue is they're, you know, it's not even hitting singles. It's getting to that single hitting where you're saying, okay, can they move the deal at 10 to 20 million and does that company get to 50? We have some in our portfolio that have already done that and that's just, you know, it's kind of simple business. That's what we're going to do. We'll just focus on bringing in vendors, growing up with them, keeping them as long as possible and servicing them the best way possible and then jettison the ones that are, you know, either the margins going out of the product and you can say, wow, the margins are low already, but that's the business we're in. And the only thing that both of those margins is more service piece of it, which, you know, the industry talks about all the time. And you can see in some of our results that we are doing some of that with the CDF group, and we'll bring some of that to the U.S.

Great. And then the gross profit side of that, do you see that as, you know, talk about how you view gross profit as a percentage of adjusted gross billings. Is it a percentage number, a dollar number? Yeah.

You're right, Howard, as far as you should look at the adjusted gross billings because that's the money we're collecting every day. Then that's, you know, a part of the gap piece of it, how we actually have to count it for, you know, the gapping and the accounting side. But you look at our gross profit growth, you know, you need to track us by gross billings, gross profit. You know, yes, it's 5%. Our major competitors, you know, they're doing stuff in the sub-4 range. We have to do that once in a while as far as when it gets competition, but that's our goal, and we'd love to, you know, add some stuff of creative to the business that will get us over that five and keep it going in that direction. But, you know, judge us by the gross profit piece of it and then how much do we spend out of the gross profit and how much can actually drop to the bottom line. Are we at that inflection point, the scale? No. Do we feel like we're close to that? Yes. That we can really put, you know, and show the leverage that the business has where, and it's really about our vendors. You know, they launch, they take off, one goes public, next thing you know we're riding that train and you'll see that inflection point where you see more drop through.

Great. Thanks. And once again, wonderful question. And Drew, welcome to the team and a great quarter to start.

Thanks, Howard.

And our next question comes from Walter Ramsey. Please go ahead.

Oh, thank you. Congratulations. Super quarter. Question about the tax rate. That was down a little in the quarter. Can you give us an idea of what it should look like for the Second half and maybe just for the full year.

Yeah, Walter, the effective tax rate is slightly lower than the historical trends, predominantly due to our CDF acquisition and some of the European tax rates when you factor in the various component parts thereof. It's actually lowered our overall effective tax rate. So we look to probably be at that $22.1, $22.3 0.2% for the balance of the year and year-end overall.

Okay. That sounds good. And the SolarWinds company, I mean, they've had their problems. Has that spilled over into your business, or could you just talk about that a little?

Yeah, thanks, Walter. We talked a little bit on Q1 because it was really affecting us We've doubled down with SolarWinds. They've been a great partner of ours. We've actually spent time with their team in Austin, you know, so everybody's getting back to the office. So, you know, some recovery in Q2, we continue to see that going on. They've split off with one of their MSP divisions called Enable, and we've signed the contract with them, so we'll actually have a two-fold approach, you know, from the legacy SolarWinds and going forward. But, yeah, you know, they're a good company. They're actually going to do some retooling of how they go to market with their tools and monitoring. So I think we'll see some exciting stuff out of that come into Q4. Just like, you know, Sophos has been a good, you know, we've had soft quarters with them and it's been strong quarters. Sophos announced their firewall, new firewalls, and that's been just a bolster or boosting to their sales for this quarter as well.

Okay. Sounds good. Well, thanks again. Great quarter.

Thanks, Walter.

We have no further questions at this time. I will turn it over to Dale Foster for final remarks.

Thanks, Albert, and thanks to all the shareholders. Appreciate your support. Thanks for the questionnaires that you put in. We'll definitely reach out to the investment community and just keep updating on what we're doing. And if you have any requests for meetings, hook up with Sean. Thanks to the board of directors. Our board's got a different look to it. Great meetings this week with our board. And thanks to the employees. Everybody's back and charging strong. So I appreciate it. Thank you, everybody, again. Appreciate it.

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