Wayside Technology Group Inc

F:PYA

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Wayside Technology Group conference call. [Operator Instructions] As a reminder, 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 Second Quarter 2019 Earnings Call.

Before turning the call over to Dale Foster, President of Lifeboat Distribution, I will dispense with the customary cautionary language and comments about the webcast for this earnings call. We released earnings for the second quarter at approximately 5 p.m. Eastern Time, Wednesday, August 7, 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 www.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 Form 10-Q and 10-K filed with the SEC. Wayside Technology Group, Inc. 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 filed with the SEC.

Now I would like to turn the call over to Dale.

[Dale Foster, executive]

Thanks, Melanie, and good morning, everyone. Thank you for joining us today to discuss our second quarter 2019 operating results. This quarter, we saw some tangible results from investments we made in vendor recruitment and sales and marketing over the past 18 months with revenues increasing 15% over the second quarter last year and gross margin dollars increasing $1.3 million or 20%. We also saw the leverage this new model can achieve with non-GAAP net income increasing $1 million or 117% over the same quarter last year. It is also noteworthy that this increase in gross profit was achieved entirely within our Lifeboat business, providing validation of our strategy in building upon Lifeboat's position in the market.

In the technology market defined by new entrants and disruption, Lifeboat has developed a unique presence with a diverse line card and 20-plus years of history in the channel. In 2018, we expanded our vendor recruitment and field sales organizations to increase the breadth of our vendor relationships and provide a higher level of sales interaction to our partners to support our growth initiatives.

2019 is clearly beginning to show the return on this investment in the form of increased gross profits as we remain focused on providing the highest level of support to our existing vendor partners along with expanding relationships with new and emerging technology innovators.

Our year-to-date results showed similar improvements with gross profits totaling $1.7 million or 12%, with $0.9 million dropping through to our net income line.

As we continue to execute on this strategic plan to become the leading distributor for new and emerging technology companies, we consistently tune our sales and marketing investments to drive success with emerging partners.

Looking back over the last 6 months, we have made significant progress with a number of emerging vendors. We continue to invest in field-based sales positions and adding outside sales team members in several additional territories. These investments are allowing us to reach incremental resellers with our vendor partners. These field sales resources will enable us to cross-sell multiple emerging brands to our base of value-added resellers as well.

From a marketing standpoint, we've begun to offer our GSA contract vehicle with our vendor partners. We are actively teaming our vendor -- our valued resellers with our manufacturer partners on GSA contracts. We've launched new relationships with outstanding security players, such as Imperva and Garland Technology. We've also launched a relationship with Diamanti in the rapidly evolving container space. And we just recently added Arcserve to the backup space -- to our backup space to complement our portfolio in storage vendors.

I will now turn over the call to Mike Vesey, our CFO and Vice President of Finance, to review our operating results in more detail.

[Michael Vesey, executive]

Thanks, Dale. I'll review our financial results for the second quarter then discuss our balance sheet and liquidity. Overall, net sales for the quarter increased 15% to $50.7 million compared to $43.9 million for the second quarter last year. Lifeboat Distribution net sales were up 23% for the quarter to $47.3 million, while TechXtend net sales were down 40% for the quarter to $3.4 million.

Gross profit for the quarter increased 20% to $7.8 million compared to $6.5 million for the same period last year. Lifeboat Distribution gross profit for the quarter increased 35% to $7.1 million compared to $5.3 million for the second quarter of last year due to growth in several of our more significant product lines, incremental sales from new product lines and approximately $400,000 due to changes in vendor rebates and early pay discounts. Our TechXtend business declined in part as a result of the decreased extended payment sales terms, which we determined were not providing adequate return on capital required to fund them. The decline in this line of business has had a negative impact on consolidated net sales and gross profit but has freed up capital to invest in our core Lifeboat business.

Gross profit margin, as a percentage of net sales, increased 15.4% to 14.8% in the second quarter last year. The change in gross profit margin was mainly due to the change in the percentage mix of products recorded on a net basis under ASC 606.

During the second quarter of 2019, approximately 9.7% of our net revenues were from security maintenance and other products, which we reported on a net basis, or an effective 100% gross margin compared to 8.7% in the same quarter last year. This shift in product mix had the effect of increasing gross profit as a percentage of net sales by 90 basis points. This increase was partially offset by lower gross profit margins on software and hardware products recorded on a gross basis.

Total selling, general and administrative expenses for the quarter increased by $200,000 to $5.5 million compared to $5.3 million for the same quarter in 2018. These increases were partially offset by lower stock-based compensation expense. SG&A expenses as a percentage of net sales for the quarter were 10.8% in 2019 compared to 12.1% in 2018.

For the second quarter of 2019, the company recorded a provision for income taxes of $500,000 compared to $100,000 for the same period in the prior year. The company's second quarter of 2018 provision for income taxes was impacted by limitations on the deductibility of executive compensation resulting from Section 162(m) of the Internal Revenue Code and adjustments to the accrual for state income taxes in states which have enacted economic nexus statutes.

The company's effective tax rate for the 3 months ended June 30, 2019, was 22.8% compared to the company's effective tax rate on ordinary income before separation expenses of 24.1% in the same period in 2018. As a result, net income for the quarter ended June 30, 2019, was $1.9 million compared to a net loss of $1.1 million for the same period in 2018.

The second quarter results for 2019 and 2018 were impacted by $100,000 and $2 million of separation expenses, net of taxes, respectively. Therefore, we presented non-GAAP net income, excluding the impact of separation expenses, net of taxes in our earnings release. On a non-GAAP basis, net income was $1.9 million for the second quarter of 2019 compared to $900,000 for the same period in 2018, representing an increase over 100%.

Diluted earnings per share for the quarter ended June 30, 2019, was $0.41 compared to a diluted net loss of $0.25 for the same period in 2018. Non-GAAP diluted earnings per share, excluding separation expenses net of taxes, was $0.43 for the second quarter of 2019 compared to $0.20 per share for the same period in 2018.

On a year-to-date basis, June 30 non-GAAP net income, excluding separation expenses, was $3.4 million compared to $2.5 million for the same period in 2018, while non-GAAP diluted earnings per share was $0.75 compared to $0.55 for the same period in the prior year.

Moving on to our balance sheet. We continue to maintain a strong balance sheet and liquidity position with cash and equivalents of $9.4 million at the end of the period compared to $14.9 million on December 31, 2018.

We have 0 outstanding borrowings under our $20 million credit facility. The decrease in our cash balance reflects a short-term impact resulting from changes in the utilization of early pay discount terms by us and our vendors, which positively impacted our gross margins this period as well as increased sales to one of our customers with extended payment terms.

Stockholders' equity stood at $42.8 million compared to $40.6 million at the end of last year. Total working capital, including cash, was $38.9 million compared to $36.2 million at the end of last year.

We continue to run a capital-efficient business, with return on invested capital of approximately 23% during Q2 2019 compared to 16% in the same period last year. We calculate return on investment capital by dividing non-GAAP net income, excluding separation expenses, net of taxes, by stockholders' equity less cash.

We returned a significant portion of our earnings to stockholders in the form of a dividend. On August 6, 2019, the Board of Directors declared a quarterly dividend of $0.17 per share of its common stock, payable on August 23, 2019, to shareholders of record on August 19, 2019.

I will now turn the call back to Dale Foster for concluding remarks.

[Dale Foster, executive]

Thank you, Mike. I would like to thank all of our employees whose hard work continues to make this a great company and a place to work. Your initiatives are noteworthy. I would also like to thank our vendors and customers, who have been wonderful in working together to achieve our mutual goals.

Lastly, I would like to recognize our Board of Directors and shareholders for their ongoing support and encouragement as we continue to execute our long-term strategic business plan.

With that, operator, please open the call to our investor and analyst community for questions.

[Operator]

[Operator Instructions] Our first question comes from [ Luis Molson ].

[Unknown Attendee]

I was just wondering. I've followed the stock for many years, and there are 2 things that I had in mind. The earnings that you've just produced, which seemed to be very good, is this an anomaly or is this something that you're confident of generating on a going-forward basis based on the configuration of the different salespeople that you've added and the software that they're now selling to the customers?

[Michael Vesey, executive]

Yes, this is Mike Vesey. The way we look at the business, we have 2 segments of our business, TechXtend and Lifeboat. And our TechXtend business, as we've discussed in the past, tends to fluctuate from quarter to quarter. It's kind of a deal-oriented business, a big deal one quarter, a smaller deal the next.

Over the past 1.5 years, we've been focusing on building the Lifeboat business, which is a little more predictable. Their step functions as we add vendor relationships and growth driven by various things, acceptance of our vendors, products in the marketplace, our vendors' [ year-ends ] play into it.

So we believe we're focused -- that being said, we believe we're focusing on the more sustainable part of our business in Lifeboat. We think it's within our strategy of exploiting a market niche for emerging technologies or disruptive technologies. It's not a stagnant market. There's always new entrants, and we feel we have an advantage there. So to the extent -- from a strategy perspective, we think we're trying to execute in a sustainable part of the market. From an anything-could-happen point of view, that's always a risk in any business. So tomorrow, the technology spending could be down and things like that, so we're always subject to those same risks. So that's I think the way to view it.

[Unknown Attendee]

And also I noticed that there are no analysts following the company. Is there any effort in terms to get more exposure for the stock, especially since you had a really nice dividend and you've got a good balance sheet and you seem to be moving in the positive direction in terms of how you're configuring your sales force and products?

[Michael Vesey, executive]

Yes. The answer is yes. We've had a lot of changes in the company over the past year, and we have begun some outbound awareness at conferences and follow-up meetings with people. In terms of getting analyst coverage in the small-cap universe right now, as you're probably aware, that has changed a little bit. So we do have an eye towards trying to get some interest and get people writing on us. We feel we may have to just create some general awareness in the market through conferences and execute on a couple of quarters under our business strategy perhaps to really get that in place. So definitely something that we're working on. I would put it under the more general category of creating market awareness and establishing it, we could execute upon our strategy.

[Unknown Attendee]

There's always a large amount of shorts in the stock according to the statistics that I'm looking at. What do you suppose that is?

[Michael Vesey, executive]

I don't know if there's a specific reason. To be honest with you, there's not a lot of trading in our stock, so I don't know that the numbers that you're looking at reflect a -- it depends on how we quantify a lot of short interest in the stock. So I don't think we have the ability to -- nothing known that we think would drive that in terms of industry fundamentals or it's not like a best buy situation, where somebody is betting -- I think, betting against industry or anything like that.

[Unknown Attendee]

I remember when the stock was just around 18 and it changed at one point and that's consistently gone down. But if at this point because of the quarter you just did, plus it seems to be now the emphasis on changing your format and it's been successful, now is the time to really try to get some public interest. So as you say, I hope you continue to look for analysts that might help you get that kind of interest because it will certainly help get the price of stock up. And [ today ] there's a fair amount of interest and then some people who noticed you really came out late today. So I think that it looks positive, and I wish you guys the best of luck on continuing to do a good job.

[Michael Vesey, executive]

I appreciate that.

[Dale Foster, executive]

Thanks, Luis.

[Operator]

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

[Michael Vesey, executive]

Yes. We'd like to thank everybody for joining us for our quarterly conference call and look forward to the next call after our third quarter. Thank you.

[Operator]

Now this concludes today's conference call. You may disconnect at this time, and thank you for joining.