Climb Global Solutions Inc

NASDAQ:CLMB

Earnings Call Analysis

Climb Global Solutions Reports Strong Q3 Growth Driven by Acquisitions and Organic Expansion

Climb Global Solutions achieved impressive growth in Q3 2024, with adjusted gross billings rising 65% to $465.2 million, propelled by acquisitions and a robust core business. Net income more than doubled to $5.5 million, while adjusted EBITDA surged 96% to $9.9 million, reflecting efficient operations. The company continues to invest in expanding its European presence, with specific emphasis on the DACH region. Looking ahead, management anticipates further operational improvements and aims to maintain a 3% SG&A level relative to adjusted gross billings. Climb plans to close out 2024 strong, projecting significant revenue contributions from newly integrated acquisitions.

Strong Financial Growth in Q3 2024

Climb Global Solutions reported robust financial results for the third quarter of 2024, showcasing growth across key metrics. Adjusted gross billings (AGB) soared by 65% to $465.2 million, compared to $281.9 million during the same period last year. This remarkable growth was driven by a combination of organic expansion and contributions from recently acquired companies, DSS and DataSolutions. Net sales also increased substantially, rising 52% to $119.3 million from $78.5 million in Q3 2023, indicating a healthy core business performance amid strong market demand.

Profitability and Margins

The company saw its gross profit jump 70%, reaching $24.3 million, which allowed for an increase in gross profit margin percentage to 5.2%. This increase was largely attributed to organic growth and significant contributions from acquisitions. Notably, SG&A (selling, general and administrative expenses) decreased as a percentage of AGB to 3% from 3.6% year-over-year, demonstrating improved operating efficiency, which is a favorable indicator for profitability.

Net Income and Earnings Per Share

Net income in Q3 more than doubled to $5.5 million or $1.19 per diluted share, up from $2.4 million or $0.52 per diluted share in the comparable quarter last year. This impressive performance aligns with the company’s strategic goals, although the results were slightly affected by $1.2 million in charges tied to acquisition-related matters.

Increased EBITDA and Efficient Management

Adjusted EBITDA for Climb surged by 96% to $9.9 million from $5.1 million the previous year. This growth was primarily fueled by contributions from both core business operations and acquisitions, with a notable increase in the effective margin to 41%, up from 36% last year. The management emphasized their commitment to maintaining SG&A within the 3% range of AGB, thereby reinforcing their focus on sustainable operational leverage and efficiency.

Active M&A Strategy Positioned for Future Growth

Climb continues to explore acquisition opportunities to enhance its geographic presence and service offerings, particularly emphasizing its strategy in Europe. The management forecasts that their robust balance sheet will support ongoing M&A activities, which will be crucial as they target 1 to 2 acquisitions per year moving forward. This strategic approach is designed to capitalize on emerging technologies and strengthen existing vendor relationships.

Expansion into New Markets

The company is proactively expanding its footprint into the DACH region of Germany, which is a significant market in Europe. Climb's management is optimistic about building local relationships and enhancing their market presence through dedicated teams, indicating a serious investment into geographical expansion to better serve customers and drive growth.

Outlook for Q4 and Beyond

Looking ahead, Climb's CEO expressed confidence in the upcoming fourth quarter, historically a strong period for the company, with many license renewals expected to bolster sales. With the previous trends and the operational efficiencies expected from their new ERP system, management anticipates closing out 2024 on an exceptional note, further solidifying their market position and financial performance.

Earnings Call Transcript 2024-Q3

[Operator]

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 Adviser, Mr. Sean Mansouri 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 www.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. 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, adjusted EBITDA, adjusted net income and 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 8-K we furnished to the SEC yesterday.

With that, I'll turn the call over to Climb's CEO, Dale Foster.

[Dale Foster, executive]

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 DataSolutions Ireland onto our operating platforms.

Also in Q3, we rebranded DataSolutions Ireland to Climb Channel Solutions with a great evening on September 5 in Dublin sharing our launch to -- with Climb team and the vendors and customers.

Additionally, we generated double-digit organic growth in both the U.S. 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, Go Guardian 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 retailer 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 synergies 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 ecosystems that solve today's most difficult IT challenges.

For example, in Q3, we evaluated 29 vendors, but signed only agreements -- signed agreements with only 4 of them. I'd like to quickly highlight one of these wins. In September, we announced a partnership with A-LIGN, a leading security and compliance solution provider that is trusted by more than 4,000 global organizations. A-LIGN combines deep compliance expertise and innovative audit management technology to mitigate cybersecurity risks, while navigating complex regulatory requirements.

By partnering with A-LIGN, 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 A-LIGN as we continue to scale 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 competed -- completed a Climb 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 Climb's presence in Germany and the DACH region.

As we mentioned before, we went live with our new ERP system during the quarter. While it has -- 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 capability 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 accretive M&A, will enable us to close out 2024 on a strong note and achieve another record year of performance.

With that, I will turn the call over to our CFO, Drew Clark, and he will take you through the financial results. Drew?

[Andrew Clark, executive]

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 the contribution from our acquisitions of DSS on July 31 and DataSolutions on October 6 of last year.

DataSolutions and DSS combined for $81.3 million or 44% of the growth in AGB, while our core business grew by $102 million, representing 50% -- 56% of the increase and year-over-year growth of 36%, which was positively impacted by several VAST orders in the quarter.

Gross 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 DataSolutions, which represented $40 million -- $4 million or 40% of the growth. Gross profit as a percentage of adjusted gross billings increased to 5.2% 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 DataSolutions 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 3.6% in the year-ago period.

Net income in the third quarter of 2024 increased more than 2x 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 DataSolutions. Adjusted net income also increased more than 2x 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 DataSolutions. 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 paid 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 borrowings 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 to 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 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.

[Operator]

[Operator Instructions] Our first question will come from Vincent Colicchio with Barrington Research.

[Vincent Colicchio, analyst]

Yes. Nice quarter. Curious if your top 20 vendors grew in line with the overall business.

[Dale Foster, executive]

Yes. I wouldn't say all 20 of them, but the core of them, that's what's really driving the growth on organic side, Vince. So it is -- we still have some new entrants into the top 20.

If you look at the 14 through 20, they -- there's more of them as you go down the Line Card. So they'll jump up. And it depends. 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.

[Vincent Colicchio, analyst]

And 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 performed better or worse than expected outside of that.

[Dale Foster, executive]

Yes. As Drew mentioned, VAST Data, we talked about it. It's a vendor that we signed on the U.K. side with the acquisition of Spinnakar, and that brought us to the U.S. So had our first order come in with sizable out of North America and Canada. We're starting to see a pickup in the States. So that's going to be lumpy. So you'll see that, and we'll talk about that as the orders come in.

But outside of that, security is still driving a lot of it. And 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 cybersecurity is the -- and also the amount of vendors that come toward us with security flair to us is -- out of those 29 we evaluated, probably 2/3 of them were some type of security platform or product. And the ones that we just have too much in overlap, we just pass on and -- because we've already spent the time in onboarding and launching the ones we have in our portfolio.

[Vincent Colicchio, analyst]

And Drew, your adjusted SG&A levels relative to AGB were relatively efficient. Is that a sustainable level? Or do you plan to make investments that will bring that to more normal levels?

[Andrew Clark, executive]

Well, our goal, Vince, as we've stated here 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, from both DataSolutions and from Douglas Stewart Software.

So 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 rate. So there'll be incremental dollar growth over time, but as a percentage, it should hopefully continue to be in that 3% range.

[Vincent Colicchio, analyst]

And Dale, will the DACH region become a priority for an acquisition?

[Dale Foster, executive]

Yes. I've talked about it probably for the last 3 or 4 quarters. It is. And it's based on looking -- a couple of 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 an emerging tech that we actually sell to.

So the big GDP market in the DACH 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. And he will also help us vet through some of the potential acquisitions we're looking at and have been looking at.

[Vincent Colicchio, analyst]

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

[Dale Foster, executive]

Yes. No, 2025, we've always said that it's 1 to 2 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 3 or 4 years.

[Operator]

[Operator Instructions] Our next question will come from Bill Dezellem with Tieton Capital.

[William Dezellem, analyst]

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 termination, severance? What were those activities, please?

[Andrew Clark, executive]

In terms of the M&A costs?

[William Dezellem, analyst]

Yes, the $609,000, what were those costs actually for?

[Andrew Clark, executive]

Predominantly, Bill, professional services associated with the transaction. So we had some expense associated with DataSolutions as we wrap up their earn-out. We had some carryover expenses related to Douglas Stewart Software & Services, which we closed on the July 31. And then some ongoing investments as we continue to explore opportunities.

[William Dezellem, analyst]

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

[Dale Foster, executive]

Yes, and that's a good question, Bill. The -- if we look at every -- of course, every acquisition is a little different. Sometimes, you have the sellers staying on board, like a 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.

So if we -- if I look at our last 5 acquisitions, we have some of the operators that have stayed on board, but we've never had gone in and saying, "Okay, it's the top tier of execs that we're going to deal with a big severance play." The one with the DataSolutions in Ireland, Michael stayed on for 6 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, right? 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.

And they can see from our original plan of 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.

[William Dezellem, analyst]

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?

[Dale Foster, executive]

Yes. Here's my -- and I just -- 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 2020 part of Interwork acquisition.

I said, "Listen, just reach out to my 3 or 4 people that are still with us of acquired companies, and let them tell you. I don't want to be on the call. Can you explain what your experience was when Climb acquired you? What's 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, that was a little different because we wanted to get into the 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 #1 challenge?"

And the #1 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 -- a lot of them are in 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 #1 challenge.

If that's the #1 challenge, we already have a business fit because we launched in North America with a global contract, and we can take it into their sales teams. What does salespeople want? They want more things to sell. So that's pretty much across the board of the companies that we've acquired in Europe.

[William Dezellem, analyst]

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?

[Dale Foster, executive]

Yes. It will -- 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 is 48 of the states and their fiscal year June 30.

So you see that they're building up what people are going to buy, and then that will pick up their best 4 months, June -- or July through November or October.

So yes, Q4, it's going to be strong as well. We get to see the renewals that are coming up or that are not going to be renewed. And like we say, most of our renewals is annuity stream for us, whether it's a SaaS 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 say, "Yes, 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.

[William Dezellem, analyst]

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

[Dale Foster, executive]

So I'll take it from the beginning of us onboarding vendors. That pipeline has been as strong as ever when 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 on 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, Bill, so we're not -- we don't have logistic issues. We don't have this -- the market has been talking about this refresh of endpoint, 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 Canalys event last week and they're talking about, hey, that's going to have some recovery in Q4. It will help us, but it hasn't hurt us because Drew famously loves to say, "People can't go without their securities. They can't go without protecting their systems. They can't go without protecting their endpoints."

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.

[William Dezellem, analyst]

And so would you characterize the macro environment as being reasonably strong then just from your perspective alone?

[Dale Foster, executive]

From where we sit in it, it's still very strong as you saw some of it in our Q3 results, and that we just don't see a [indiscernible] downturn. And if it's [indiscernible] refresh that is supposedly coming comes, it will only help with us because everybody will say, "Okay, you know what? I've got all my new laptops deployed. I should really take a look and say do I have the right product to [indiscernible] protection on them?"

[Operator]

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

[Dale Foster, executive]

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

[Operator]

Ladies and gentlemen, this concludes today's event. You may now disconnect.