Wayside Technology Group Inc

F:PYA

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Wayside Technology Group conference call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today's conference, Melanie Caponigro. Ms. Caponigro, you may begin your conference at this time.

[Melanie Caponigro, executive]

Thank you, and good morning. Welcome to Wayside Technology's First Quarter 2019 Earnings Call. Before turning the call over Steve DeWindt, the company's President and CEO, I'll dispense with the customary cautionary language and comments about the webcast for this earnings call. We released earnings for the first quarter at approximately 5 p.m. Eastern Time, Wednesday, May 8, 2019. The earnings release is available at the company's Investor Relations website at waysidetechnology.com. Today's call, including all questions and answers is being webcast live and a rebroadcast will be available at waysidetechnology.com/site/content/webcast.

I'd like to remind you that certain comments made in this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in our Forms 10-Q and 10-K filed with the SEC. Wayside Technology Group sees no obligation to update and does not intend to update any forward-looking statements.

Our presentation also includes certain non-GAAP financial measures, including adjusted gross billings, non-GAAP net income and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the earnings release and Form 8-K we furnished to the

[Technical Difficulty]

[David DeWindt, executive]

Hello. Can you hear me? Hello.

[Operator]

This is the operator. Melanie's line has been disconnected, one moment.

[David DeWindt, executive]

Okay, thank you. Hello.

[Melanie Caponigro, executive]

Hi.

[David DeWindt, executive]

Sorry, the operator told me that you had been disconnected.

[Melanie Caponigro, executive]

We were disconnected, sorry about that. I'm not quite sure where we left off.

Our presentation includes non-GAAP financial measures, including adjusted gross billings, non-GAAP net income and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the earnings release and Form 8-K we furnished to the SEC.

Now I would like to turn the call over to Steve DeWindt.

[David DeWindt, executive]

Thanks, Melanie. And good morning, everyone. Thank you for joining us today to discuss our first quarter 2019 operating results. This quarter had mixed results. On the positive side, our sales and operational teams worked hard to deliver quarterly net revenue growth of 11% year-over-year. We also closed the quarter with overall adjusted gross billings on an -- non-GAAP basis of $141.9 million.

In addition, our gross profit dollars, which is our primary indicator, increased by 5% year-over-year. On the negative side, our gross margins in Q1 were squeezed due to competitive pressure and our product mix, coming down to 16.1% compared to 17% last year.

As we have mentioned before, our operating expenses increased due to our investing in 2018 in business development and field sales personnel. As a result, our net income for the quarter was down 8%, due to the declining margins and the 2018 investment in additional personnel. Wayside's position in the marketplace has always focused on introducing new emerging vendors and technology into the IT sales channel. As you may have seen in recent press releases, we are continuing to do so, having signed several new exciting emerging technology vendors during this past quarter. With our many years of experience, we leverage our technological expertise, our logistical support and our financial tools to assist these newer vendors in building out their national sales channel.

In Q1, we continued to invest in business development personnel as well as our regional field sales team. The business development team has been focusing on bringing new vendors into our product mix. The field sales team has been focusing on expanding and solidifying our reseller network with high touch sales support. Both efforts have been successful. We also were awarded a GSA contract this past quarter, which will give our vendor partners access to the public sector, which is critical for our vendors' channel plans.

The numbers of new technology vendors and the increasing revenue from our top -- from targeted segments of our reseller network gives credence to our approach. We are encouraged by the enthusiasm our reseller partners have shown in our initiative as we make investments now to position ourselves for the future.

Our team is focused on delivering results and the services needed by our vendor partners. We continued to make progress towards our strategic goal of being the go-to channel partner for emerging technology vendors. We continue to have a strong balance sheet and have no debt currently outstanding. The company has historically returned some of our consistent profits to investors as a dividend with the current yield of greater than 5%, and we have, once again, declared a dividend of $0.17 this quarter.

This past quarter continues to show that demand for IT solutions delivered through a reseller channel, remains strong with opportunity for share gains and growth in security, hyper-converged, storage, data management and networking products. As we continue to add to our product portfolio, execute well with our field and inside sales teams, expand our customer base and focus on controlling costs and improving our IT delivery and reporting systems, we are feeling very good about the outlook for the remainder of this year. We look forward to sharing our progress on future calls.

Let me now hand off to Mike Vesey, our Chief Financial Officer.

[Michael Vesey, executive]

Thanks, Steve. I will review our financial results for the quarter, then discuss our balance sheet and liquidity. Overall, net sales for the quarter increased 11% to $44.9 million compared to $40.5 million for the first quarter of last year.

Both Lifeboat Distribution and TechXtend net sales were up, with Lifeboat increasing 9% for the quarter to $40.1 million, and TechXtend increasing 29% to $4.8 million. As we've discussed in the past, our TechXtend business accounts for about 10% of our net sales and tends to fluctuate significantly from quarter to quarter based on the timing of deal flow.

Overall, adjusted gross billings on a non-GAAP basis increased 13% to $141.9 million from $125.1 million in the prior year. Gross profit for the quarter increased 5% to $7.2 million compared to $6.9 million for the same period last year. Lifeboat Distribution gross profit for the quarter remained consistent with the first quarter last year at $6.2 million, while TechXtend increased 46% or about $300,000.

Gross profit margin as a percentage of net sales decreased by 90 basis points to 16.1% compared to 17% in the first quarter last year. The change in gross profit margin was mainly due to the change in percentage mix of products recorded under -- on a net basis under ASC 606. Under ASC 606, gross margin as a percentage of net sales is a composite of items that are recorded net of the related costs of sales or a 100% reported gross margin and items that are recorded on a gross basis, typically reflecting a high single-digit profit margin. The weighting of the 2 product categories in the composite margin is based on the relative percentage of GAAP net revenue.

During the first quarter of 2019, approximately 10.4% of our net revenues were from security maintenance and other products, which we reported on a net basis were an effective 100% gross margin compared to 11.6% in the same quarter last year.

This change in mix accounted for approximately 110 basis point decline in gross profit as a percentage of net sales quarter-over-quarter, which was partially offset by a slight increase in gross profit percentage for products recorded on a gross basis.

On a non-GAAP basis, gross profit margin as a percentage of adjusted gross billings declined from 5.5% to 5.1%, mainly due to shifts in product mix and some of our faster-growing lines are sold at a lower average gross profit margin than our historical average and also some competitive margin pressure.

Total SG&A expenses for the quarter increased by $500,000 to $5.5 million compared to $5 million for the same quarter in 2018. The net increase was entirely due to higher sales and marketing expenses in our Lifeboat Distribution segment. During the fourth -- first quarter of 2018, we added additional management resources to our vendor recruitment and field sales organizations, and as such, 2019 results reflect a full quarter of those expenses compared to a phase in last year.

In addition, in 2019, we added additional salary and commissions expense to support the onboarding, implementation and rollout of some of our new vendors, included a dedicated -- including a dedicated team for one of our more complex lines. SG&A expenses as percentage of net sales for the quarter were 12.3% in 2019 compared to 12.4% in 2018. As a result, pretax income for the quarter ended March 31, 2019, was $2 million compared to $2.1 million during the prior year.

For the first quarter of 2019, the company recorded a provision for income taxes of $500,000, which is consistent with the same period in the prior year. The company's effective tax rate was 25% for the 3 months ended March 31, 2019, compared to 23.4% in the prior year. As a result, net income for the quarter ended March 31, 2019, was $1.5 million compared to $1.6 million for the same period in 2018. Diluted income per share for the quarter ended March 31, 2019, was $0.32 compared to diluted income per share of $0.36 for the same period in 2018.

Moving on to the balance sheet. We continued to manage a strong balance sheet and liquidity position with cash and equivalents of $14.1 million at the end of the period compared to $14.9 million at the end of the year 2018, and no outstanding borrowings under our $20 million credit facility. Stockholders' equity stood at $41.5 million compared to $40.6 million at the end of last year. Total working capital, including cash was $37 million compared to $36.2 million at the end of last year. We continue to run the capital-efficient business with a return on invested capital of approximately 22% in Q1 2019, compared to 19% in the same quarter last year. We calculate return on investment capital by dividing net income by our total stockholders' equity less cash. We also continue to return a significant portion of our earnings to shareholders in the form of a dividend. On May 7, 2019, the Board of Directors declared a quarterly dividend of $0.17 per share of its common stock payable May 24, '19, to shareholders of record on May 20, 2019.

So in summary, we showed strong top line and gross margin growth this quarter overall, however, gross profit from our Lifeboat segment was impacted some delays in implementing one of our new product lines, as well some softness at one of our key vendors compared to a strong first quarter last year. Sales expenses were up as we continued to invest in business development, sales and marketing to expand our market penetration and drive growth and gross profit.

We plan to continue to monitor returns on these investments and manage our cost structure and sales investment appropriately, based on the returns we're achieving. We continued to strengthen our cash and equity position, while returning approximately 53% of our net income in the form of a dividend this quarter. Steve?

[David DeWindt, executive]

Thanks, Mike. I'm very pleased with our team's efforts in moving forward with a focused strategy and energetic pursuit of our goals. And with that operator, let's open it up for questions.

[Operator]

[Operator Instructions] At this time there are no further questions. Please continue with any closing remarks.

[David DeWindt, executive]

Okay. Well, thank you, very much. We appreciate everybody's listening in and supporting, and we look forward to presenting our progress along these goals at the next quarter's earnings call. Thanks everybody.

[Operator]

This concludes today's conference call. You may disconnect at this time and thank you for your participation.