Wayside Technology Group Inc

F:PYA

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, everyone, and thank you for participating in today's conference call to discuss Wayside Technology Group's financial results for the first quarter ended March 31, 2022.

Joining us today are Wayside's CEO, Mr. Dale Foster; the company's CFO, Mr. Drew Clark; and the company's Investor Relations adviser, Mr. Sean Mansouri with Elevate IR.

By now, everyone should have access to the first quarter 2022 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 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 will open the call for questions.

I would now like to turn the call over to Mr. Mansouri for introductory comments.

[Sean Mansouri]

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 and the 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 8-K we furnished to the SEC yesterday.

I would now like to turn the call over to Wayside's CEO, Dale Foster.

[Dale Foster, executive]

Thank you, Sean, and good morning, everyone. During the first quarter, we continued to build off our strong momentum from the end of last year. We grew our top line double digits in Q1 with our net income increasing to 79% and our adjusted EBITDA was up over 60%, reflecting the inherent operating leverage in our business. These significant improvements are a testament to the execution of our core initiatives. More specifically, we are continuing to generate organic growth with our existing vendors and customers while adding new and disruptive vendors to our line card.

This organic growth was most evident in our top 20 vendors as we grew gross billings with this group by nearly 20% during the quarter to $171 million. This reflects the strength of our relationships with our most meaningful partners and showcases both the value we are offering as well as the ability to evaluate and partner with the right companies that are bringing innovative products to the market.

We have seen a significant increase in the sheer number of brands looking to partner with time this past quarter. While we remain committed to a purposely limited line card, we did enter into a relatively high number of new partnership agreements in Q1. Line evaluated over 50 new prospective brands and signed 8 new agreements.

One of the most notable partnerships we signed in Q1 was the partnership with Cato Networks, Cato Networks is a network security company to develop secure access service edge technology, which combines enterprise communications and security capabilities into a single cloud-based platform. While Cato Networks is a relatively new company established in 2015, they pioneered the convergence of networking and security into the cloud and created a highly differentiated offering that we know will be well received by our VAR and MSP partners.

On the topic of the right partner, I'd like to highlight our sponsorship of the world record-breaking Mountaineer Nims Purja to our client subsidiary. Not only has Nims climbed all 14 of the world's Death Zone peaks over 8,000 meters in just 6 months and 6 days. He was part of the first winner ascent of the Savage Mountain K2 has filmed 14 Peaks: Nothing is impossible, is now out on Netflix, and he is the founder of the charitable Nims Guide Foundation.

Nims embodies the characteristics that we hold true here at Wayside that our employees, our partners and our customers can not only achieve their goals, but they can push themselves to the next level of success. We thank Nims for leading by example, reminding them to perform at a very high level, ensuring the success and elevation of our partners. We can't wait for Nims to carry our flag to the top of Denali's peak.

Subsequent to the quarter end, we kicked off a collaboration project with Seagate Technology, who is a world leader in mass data storage infrastructure solutions to expand its data protection and storage portfolio to the channel community through Seagate's live mobile application. With simple deployment next to limitless data capture and low-cost infrastructure investment, this combination will provide the channel community with a service-ready solution to enable the next generation of data movement mobility and migration practices to the market.

Touching on our M&A initiatives. We are continuing to evaluate opportunities in both the U.S. and abroad that will be accretive to our business and align with our strategic goals. We earn the discussions with multiple targets that can enhance specific categories of our business, including the geographic reach, vendor expansion and service and solution offerings. Each potential target fits into 1 or more of these 3 defined buckets. With our strong and growing balance sheet, we have abundant room and financing capacity to execute on various forms and sizes of acquisitions in 2022.

With that, I will turn the call over to Drew, our CFO, Drew?

[Andrew Clark, executive]

Thank you, Dale, and good morning, everyone. As we review our financial results, I want to remind everyone that all of our comparisons and variants commentary refer to the prior year quarter unless otherwise specified. Well, some might consider our first quarter of 2022 is a bit boring because it was a continuation of our team successfully executing on our business strategy.

As reported in our earnings press release, adjusted gross billings, which we all realized as a non-GAAP measure, increased 13% to $238.7 million compared to $210.9 million in the year ago quarter. This increase reflects continued organic growth from new and existing vendors. In addition, net sales in the first quarter of 2022 increased 13% (sic) [ 14% ] to $71.3 million compared to $62.8 million in the prior year quarter.

Gross profit in the first quarter of 2022 increased 11% to $12 million compared to $10.8 million for the 3 months ended March 31, 2021. Again, as Dale mentioned earlier, the increase in GP was driven primarily by organic growth from our top 20 vendors in both the U.S. and Canada, in addition to the onboarding of new vendors.

Our gross profit as a percentage of adjusted gross billings was 5% versus 5.1%, which represented 16.8% of net sales compared to 17.3% in the prior year quarter. Q1 of 2020 included a large sale in our solutions business that had a significant impact on our GP and was unusual in nature. Excluding that transaction, GP as a percentage of both AGB and net sales increased quarter-over-quarter.

SG&A expenses in the first quarter were $8.6 million compared to $8.8 million. SG&A as a percentage of adjusted gross billings improved to 3.6% compared to 4.2% as we continue to emphasize lean operations and scale our infrastructure. Net income in the first quarter of 2022 increased 79% to $2.7 million or $0.61 per diluted share compared to $1.5 million or $0.35 per diluted share for the comparable period in 2021. Adjusted EBITDA in the first quarter increased 61% to $4.2 million compared to $2.6 million.

Once again, this significant increase was entirely driven by organic growth from both new and existing vendors demonstrating our ability to leverage, scale and deliver a higher percentage of our incremental gross profit to net income and adjusted EBITDA.

Quickly turning to our balance sheet. Cash and cash equivalents increased to $37 million as of March 31, 2022, compared to $29.3 million as of December 31, 2021. While working capital increased by $2.2 million during this first quarter period. The growth was primarily attributable to the timing of our collection and payment activities and not indicative of any type of business trend at this point.

We continue to range debt free as of March 31, 2022, with no borrowings outstanding under either our $20 million or GBP 8 million credit facilities.

On May 3, 2022, our Board of Directors declared a quarterly dividend of $0.17 per share of common stock. The dividend is payable on May 20 to shareholders of record as of May 16. As we look ahead to the remainder of the year, our strong foundation continues to allow us to drive organic growth and meaningful operating leverage, all while expanding our relationships with new vendor networks and customers across the globe.

As Dale mentioned previously, we also remain diligent in our M&A strategy as we constantly evaluate targets that can enhance our geographic footprint in addition to our service and solution offerings. We look forward to delivering yet another year of strong organic and inorganic growth to our customers, partners and shareholders alike.

This now concludes our prepared remarks, and we'll open it up for questions from those participating in the call. Operator, I will turn the meeting back over to you. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Bob Sales of LMK Capital Management.

[Bob Sales, analyst]

Congratulations on the quarter. It was excellent and the progress with agreements in the M&A front. I did have a bookkeeping question. When you think about your receivables, and I'm going to ask this simply because it would jump out potentially to an analyst in terms of just pure DSOs. How do you think about your receivables relative to gross billings, revenue and then the offset of payables, so we can think better about your management of that particular figure?

[Dale Foster, executive]

You want to take that, Drew?

[Andrew Clark, executive]

Yes, it's Bob. Our receivable portfolio tends to turn fairly quickly. Most of our customers are on a net 30 billing and payment cycle. We do have aging that won't get into the 45- and 60-day bucket from time to time based the cyclicality of some of the treasury management functions of our customers, especially the larger DMRs. But because at the end of the day, our DSOs are probably sub-45.

On the payable side, we normally have opportunities where we can garner rebates or early payment discounts with our vendors. So we will take advantage of those. And there may be a slight mismatch between the receipt cycle and the payment cycle on the vendor side. But normally, fairly closely aligned on any particular month or quarter end.

I think a number of our large customers, probably participated in a little bit of window dressing at the end of the year-end. So we did have an elongation, if you will, of some of those payment cycles, but normally, fairly consistent month-to-month quarter-to-quarter. And the cash flow is, as you know, very strong in any particular quarter. Don't see any reason that those cycles will change dramatically in any particular direction is -- if you sort of try and model a little bit of the cash flow and working capital requirements for the business. We do have that excess cash, and we are diligently looking to deploy into some acquisition activity that hopefully, we can be sharing with the market in the not-too-distant future, but nothing definitive at this point.

So I'll turn it back to you, Bob, if you have a follow-up question.

[Dale Foster, executive]

Real quick. On the vendor side, I think we look at the contracts that we have with each one of the vendors, and we follow those funds. Because our relationships are so tight with these emerging vendors and getting to market that they are very flexible with their terms. There's contracts and then there's the terms per opportunity. So we're in lockstep with them as far as our receivables go and if there's extended terms, if we pass them on. But yes, it's important to us. It's each week as our executive team, we meet and talk about our receivables is a big part of the company.

[Bob Sales, analyst]

Yes. I only asked the question. I mean, your receivables were down sequentially, great. And also gross billings versus GAAP revenues sort of the storage fees, the absolute metric in that. I ask it just to -- you're doing such a sensational job financially. I don't want to give you the ability to -- in this conference call to sort of explain some perspective so someone can nitpick that down the road because your cash flow looks great, right?

The second thing I wanted to ask about was -- I'm sorry, did you want to respond to that? I just was.

[Dale Foster, executive]

I agree.

[Bob Sales, analyst]

And then help me out. What are your thoughts on the 8 new agreements and looked at [indiscernible]. Are you -- is it more the a conscientious expansion of the number of names that you want to deal with at this point? Or is it sort of casting a wider net to understand over the course of time, those vendors that will become additional strong top 20 players?

[Dale Foster, executive]

Yes. It's -- for this past quarter, it's really about timing with some of the new vendors hitting us at that period of time. And then we look pretty deeply, and we take our time vetting them. They just happened to be a timing thing where we were looking and seeing quite a few of them come at us. We've got a couple of more end of pipes that are sizable, and we wouldn't even entertain them as we're trying to onboard these 8. If it was important to the management and also the sales teams.

We get pretty much everybody involved when we look at a new vendor and say, is this fit? Is this right on portfolio, where they fit into our 6 segments of technology, and then we sign from there.

I'd like to think, and we haven't been able to verify that. I'd like to think that just because we're becoming more prevalent in the marketplace and a little disruptive to our competitors that we're getting seen by more vendors and emerging what's coming about instead of us going after them. So we'll move that out over the next year and probably a continued process.

[Bob Sales, analyst]

Okay. I'm going to keep going, I guess, not many callers since I was the first one on que too. On the M&A front, should we expect sort of the continued nature of the size, and you sort of mentioned the complementary aspects of it. But should we expect sort of the same size of ongoing acquisitions? Or do you think that you'll be looking at anything that will scale up to bigger?

[Dale Foster, executive]

Well, I can tell you without disclosing too much that we've looked at a very sizable transformative to the company. We still have some of the wings that are very small. And then -- I can't say too much, but as far as the size range from very small tuck-ins to transformative in certain regions as I talked about, what our 3 strategies are as far as acquisitions go.

And then some that are just by the actual vendors that they hold that would help -- take that vendor across all of our different regions. And that's one of the things that we did with Interwork, we acquired them and they had Trend Micro. We haven't done a great job of getting them into the U.K. or the U.K. and in the U.S. as much as we would like. So see that around the rest of this year, you'll start seeing just through the press releases that some of those vendors creep into other regions. We feel like we're successful in 1 region. Why can't we be in the other? So it's the first action that we have that we'll focus on the remainder of this year as well.

[Bob Sales, analyst]

Okay. And then last question. What are you seeing with the -- some of the challenges in Europe that we're hearing about, some of the supply chain issues and I guess, at this point, just the nervousness of the financial markets? Are you seeing any signs that buyers are getting a little bit slower in making decisions or little more cautious in spending?

[Dale Foster, executive]

So 2 things I was on a call yesterday with the Supermicro -- as Supermicro is a hardware supplier. They're like a Tier 2 for anybody that wants to buy servers that are in HP, IBM or Lenovo. And that's the issue. It's the hardware piece. We're 80% software as far as our portfolio.

The only thing that slows down with us would be if there's a big implementation going on that has hardware that goes with it, that our software, they may delay the buying cycle until they get everything ready to go and ship.

Other than that, we are in the 2 hotter spaces, right? We are in security, which everybody needs and everybody claims that they have a security product. I don't care if you're in data storage, you still say that you have security to watch but make sure you're not backing our brand somewhere. So that's the hotspot.

And then the otherwise, data center. When I think data center, people are migrating, right? Whether they're migrating to the cloud, they're using a hybrid cloud set up or they're trying to do request back off the cloud because of some of the workloads didn't work well enough in the cloud.

So we're in the 2 good spaces. We haven't seen that concern with the interest rates in the market slowing down in some spaces where we're going to watch our receivables and who we give credit to even more closely, more used to this cyclical nature over the last 20-some years of our careers.

[Operator]

Our next question comes from Howard Root, a private investor.

[Unknown Shareholder]

Congratulations on another great quarter. I've got 2 questions, 1 for Drew and then 1 for Dale. For Drew, I do everything based on adjusted gross billings, which I think you guys do, too, because the determination whether it's a sale or not, it's just an accounting division, then based on that, I look at the gross profit and then the SG&A and the gross profit, thanks for to comment on what happened there, from last year being a little aberration at the high. But Q4 to Q1, I think, went from around 4.8% to 5% sequentially. Do you see that kind of being the 5% gross profit based on adjusted gross billings as being kind of your new normal? Is going to creep up from that?

And then on the SG&A side, too, it -- the decrease of $200,000 from last year to this year surprised me. Great job on that. You always have been great on cost management. But do you see that $8.6 million? Do you see that going up? What do you see in trends on the SG&A line and on the gross profit line?

[Andrew Clark, executive]

Yes. So thanks, Howard, and good questions. On the gross profit line, if I were to provide sort of directional guidance, if you will, I would say that that's a steady state for us, and we can move the needle slightly. As Dale referenced, when we bring all new vendors, they tend to build over a period of time. They may have a more attractive economic value to us in terms of the contract that we negotiate and how we deliver and go-to-market on the [ cash ]. So I would say that is a pretty good number.

Our solutions business, as that continues to grow with our Microsoft CSP relationships that we can incrementally move that in the correct ascending direction. I don't know how much stronger we can get above 5%, to be honest, in the next year. But that's something we think about every day and work on with our vendor relationships and how do we manage early pay discounts and rebates and all the things along with both on our customer side and our vendor side. So again, just kind of directionally, I'd say that's a good trend for us, and we expect to kind of maintain that at least through the balance of this year.

On the SG&A side, to Dale's credit and the sales and marketing teams last year, we really evaluated how do we compensate our sales folks, and we wanted to make sure that we are incentivizing them properly, but also ensuring that we can create the right metrics to drive the business.

So Dale has created a really good infrastructure and organization with our sales teams that enable us to further leverage around either brand, sales specialists and products or territories. So we're getting more efficient and therefore, able to drive more adjusted gross billings with about the same type of head count.

So I think we'll continue to see SG&A improve incrementally and not significantly, but that will continue to improve as well as we move forward into the balance of 2022. Dale, I don't know if you have anything else to comment?

[Dale Foster, executive]

Yes. Let me comment real quick. Thanks, Drew. On the margin, we talked about it a lot, right? I mean we're in a margin business as far as us doing margin expansion and where we can do that. So when we look to expand margins, we have to give more value, right, what that value is. You paid a certain amount of margin just to do pick, pack and ship and then what do you do on top of that? What are you bringing into the marketplace. So we've talked about before, doing solutions, much more service and technical things.

The issue is it's important to us internally, how can we scale that to the rest of the business, and that's the job that we need to do. As we sign vendors, can we do more for them to garner a higher margin. So that's what we look at constantly. We do have some significant things in the works that we'll announce over the next 6 months easily.

[Unknown Shareholder]

Okay. And Drew, when you say improved SG&A, I mean, you're not going to drive SG&A down in an absolute number? I assume that's going to tick up. It's just on a percentage number. It's not going to increase as high as or J, your adjusted growth still is going to low. Is that what you're saying?

[Andrew Clark, executive]

Correct. Yes, correct. Yes. Not on a gross basis, but on a directional basis as a percentage of AGB, yes.

[Unknown Shareholder]

Okay. Great. And then my question for Dale. Just looking back, I think you've been running the company for 3-plus years, maybe 4 years now. And from when you started, you just had this focus on getting to your top 20 accounts, not taking every business that walked in the door and focusing, and you've done a great job doing that. The results speak for themselves. And now you're doing $1 billion in adjusted gross billings and growing double-digit, 13% increase.

And as our CFO said, it's just another boring quarter, which kind of begs the question for the next level of your visibility and everything is giving guidance. I think when I look at it, your company is now at a point where you can start talking more about the plan to get to $2 billion, $3 billion in adjusted gross billings or what the trend is for next 4 quarters would give us investors an ability to really model this out and see what's happening.

And I'd encourage you to do that on the next call. I'm not going to ask you for all the specific numbers here, but maybe you can give some perspective now that you've gotten this thing really focused on your top 20 accounts and geographic expansion. Without accounting for acquisitions, do you see this double-digit revenue or AGB growth continuing. Is 15% of your target? Is 20% of your target? Is this a $1 billion adjusted gross billing year, get $1.2 million. Where do you see it? And then when can you start giving guidance kind of looking forward now that the business really is it seems to be in a really solid position?

[Dale Foster, executive]

Yes. So on the guidance front, I'll talk about that. We've told we had our Board of Directors meeting in this week -- earlier this week, and we talked about it because we have a good Board that comes from a lot of different backgrounds. So again discussed, it's becoming much more of a talking point. So I think you'll see that in the next 2 quarters, we'll talk more specifically about that.

But to your question as far as our growth and where we see it, right. We're trying to pick off -- and I think I said on the last call, we're trying to pick off more of a Tier 2, Tier 3 vendor approach because have a good wide net of who we're calling on and want to sell more products to that group of resellers. And with that, we need to have some vendors that are not just emerging that can bring us $4 million or $5 million in gross sales per year but we can move the needle to $10 million to $20 million, it is transformative to the company. So that's what you're going to see.

I mean I like I said, we don't give guidance, but that growth rate low double digits. I mean, that's what we focus on internally. But we have some things to fix. I mean we have a new ERP implementation that we're kicking off. Drew and his team take it off a couple of months ago. That's going to be transforming the company to continue to make sure that we can we keep our SG&A at the right level so we can actually scale.

And we -- I don't believe we're at the scaling point yet in the company or that real inflection point. We can feel the coming, but we still have to get our systems in line to be able to onboard vendors, onboard customers and transact more efficiently. And right now, great systems that we built over the years been of the size that we are and we're going to.

[Unknown Shareholder]

So just a follow-up, what do you see as a transformative growth size-wise? Is this -- this market is huge, but your segment is kind of the smaller end of that. Is this potentially a $5 billion adjusted gross billings company, excluding acquisitions? Do you see that in a 5-year plan? Or is this getting up to a maximum where you got to acquire to get the business to continue to grow at this rate?

[Dale Foster, executive]

It's a combination. We want to acquire just because we think what we're doing is good in the states, and we can acquire and move those into different geographies. The targets are all gone. And like I said before, in the state. So we're going outside of there.

But yes, $5 billion in 5 years. I mean I wouldn't say that outside of the norm that we could do. And there's not the maturity that are going to do just by acquisition to get us there, right? It's going to be organic, it's going to be some other pockets or adjacent markets that we look into.

But if you look at the smallest of the big 3 IT distributors, which is Arrow at $30 billion, there's a huge gap between us and Arrow and then you have Ingram and Tech Data Synnex on top of that in the $40 billion and $50 billion.

So there's a lot, but we just don't want to keep driving to adjusted gross billings. We do want to do both, right? We want to increase our sales, and we want to try to expand our margin in areas that we can. That won't show up overall, but it will show up in certain pockets that we become that more entangled with our customers because that's what we want. I want a customer for 10 years, not 10 orders, and we're going to keep that same mantra as we go no matter what.

[Unknown Shareholder]

Yes. You cut out there. Sorry about that, but I think I got most of it. And I'll listen to the replay if there's anything I missed. But congratulations on a great quarter. And I just encourage your next call, spend a couple of minutes talking about the long term of the company and the guidance kind of going forward as much as you can.

[Dale Foster, executive]

You got it.

[Andrew Clark, executive]

Howard, as Dale referenced, we did a deep dive with our Board in sort of a strategic session and you must have been a fly in the wall because we absolutely will be starting to share some -- I'd hate to say guidance, but sort of directional trends that we are looking forward to over the next 2 to 3 years. So at least you all will have a sense of some guidepost, but we won't be uber specific, but we absolutely will provide some directional thoughts and guidance to the market after our Q2 earnings call.

[Operator]

Our next question comes from Bruce Lindeman, a Private Investor.

[Unknown Shareholder]

Hi, me and my wife are shareholders for over 20 years. We want to thank you for the great job you've done with this company over -- since taking over. Our question is very, very -- the liquidity is very problematic. Sometimes it could be $2 to $3 during the trading day. And even though it's not [indiscernible] to split a stock at these levels, maybe it's possible that some sort of stock split -- because at least get more shares into the market and make it more. Because to attract investors, especially institutions, they've got to be able to get decent number of shares, and they also have to be able to get liquidity. So that might give us some liquidity. What are your thoughts?

[Dale Foster, executive]

Yes. Thanks, Bruce. We talk about it in the various meetings as far as the exact comment you made as far as liquidity goes. We haven't come up with exact plans that the company is going to go for. But I can tell you, discussions not I think we're sitting and saying, hey, it is what it is. We look at different levers that we can pull. We think that our stock, that people look at it they say, hey, this is a good value and where the company is going to go. So we need to do more work on that side.

I can tell you, just personally -- I mean, we're just -- we're so focused on driving that business and we need to look. And then we part of our strategic meeting this week with the Board sort of where we're going to go. What's important to our shareholders and guidance came up in liquidity, it comes up on almost every meeting. So -- and we hear you, we don't have an answer for you today.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Foster for any closing remarks.

[Dale Foster, executive]

Thank you, operator. I'd like to close this call thanking all of our stakeholders, and a special thank you to our growing global employee foot count, just got a great team wherever we go, we are making a difference, you'll see more and more of our company's names out there. Climb is very prevalent, and our new gray matter transformation in the U.S., is getting more and more traction. So you'll see that. I thank you all and all of our stakeholders.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.