Climb Global Solutions Q1 2023 Earnings Call Transcript

There are 6 speakers on the call.

Operator

Morning, everyone, and thank you for participating in today's conference call to discuss Climb Global Solutions Financial Results for the First Quarter ended March 31, 2023. Joining us today are Climb's CEO, Mr. Dale Foster, the company's CFO Mr. Drew Clark and the company's Investor Relations Advisor, Mr. Sean Mansouri with Elevate IR.

Operator

By now, everyone should have access to the Q1 2023 earnings press release, which was issued yesterday afternoon at approximately 4:0:5 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 available for webcast replay on the company's website.

Operator

Following management's remarks, we'll open the call for your questions. I'd now like to turn the call over to Mr. Mansouri with introductory comments.

Speaker 1

Thank you, Amy. 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.

Speaker 1

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 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 ks we furnished to the SEC today. I'll now turn the call over to Climb's CEO, Dale Foster.

Speaker 2

Thank you, Sean, and good morning, everyone. As you can see, our momentum from 2022's record year has carried into our Q1 with significant growth in all of our key financial metrics. Our performance was driven by continuing to execute on our core initiatives, generating organic growth with existing vendors, while adding new vendors to our line card. In addition, we continue to drive growth and margin expansion from our integration of Spinnaker, which we acquired last August of last year. Excluding Spinnaker, we generated double digit growth on both the top and bottom line, demonstrating the strength of our core business as we continue to scale our line card in the U.

Speaker 2

S. And abroad. Out of the 18 vendors that that we evaluated throughout the quarter, we signed agreements with only 4 of them, demonstrating our commitment to a limited line card that is focused on the most innovative technology brands in the market. I'd like to highlight one of the latest partnerships that we launched in Q1 in North America. We partnered with Logic Gate, a vendor that was first part of the Spinnaker portfolio of vendors.

Speaker 2

They are a leading provider of transformative risk and compliance solutions delivered on their risk cloud platform. We look forward to growing our relationship with Logic Gate as we continue to Toronto based value added specialty distributor followed by the acquisition of CDF Group, a UK cloud software IT distributor and service provider. As I mentioned earlier, last August, we completed the acquisition of Spinnaker, another UK based IT channel distributor focused in the EMEA region. These are accretive transactions have not only extended our geographic reach beyond the United States, but have also enabled us to reap the benefit cross selling opportunities between each entity in each region. This further reflected in our recent entry into the French market with Spinnaker's relationship with VAST Data.

Speaker 2

We expect additional cross selling opportunities as we expand our reach across new regions. Quickly commenting on the macro environment, we do see a potential slow of IT spend across our regions, mainly in hardware sales, which could have a downstream effect on software sales. For example, less investments in hardware such as laptops, computers and servers that leads to reduction in various endpoint solutions. With the recent announcements of both large vendors and customers rightsizing their businesses, we will be paying close attention to where we can maintain our growth while being adaptive and agile to the needs of our customers. We believe the core segments of the market where we focus, which includes emerging technology companies operating in cybersecurity, storage, HCI, data management, network connectivity and cloud are somewhat insulated from the broader issues impacting other verticals as these are key areas of investment for most companies.

Speaker 2

Looking toward the remainder of 2023, we expect to continue to drive organic growth and further improve our operating leverage as we scale our business. With a strong balance sheet and pipeline of M and A targets, we continue to be selective as we pursue acquisitions that will not only be accretive to our business, that will align with our culture and strategic goals. We have set the tone for 2023 with a strong Q1 and look forward to delivering another year of exceptional growth and profitability. With that, I will turn the call over to our CFO, Drew Clark, and he'll take you through the financial results. Drew?

Speaker 3

Thank you, Dale, and good morning, everyone. Gil gets the exciting content and I get the boring. As we discuss our Q1 financial results, I'd like to remind everyone that all comparisons and Verint's commentary referred to the prior year quarter unless otherwise specified. So let's get started. Q1 results marked our 8th consecutive quarter of double digit profitability improvement.

Speaker 3

A little qualifier, Dale likes to remind me that I was only here for 7 of those. As reported in our earnings press release, adjusted gross billings, which is a non GAAP measure, increased 29 percent to $306,700,000 compared to $238,700,000 in the year ago quarter. The increase was driven by organic growth from new and existing vendors as well as a contribution from our acquisition of Spinnaker, which closed in August of last year. In addition, net sales in the Q1 of 2023 increased 19% to $85,000,000 compared to 71,300,000 which reflects double digit organic growth from new and existing vendors as well as a contribution from Spinnaker offset by a slight reduction due to the impact of FX. Gross profit in the Q1 increased 27 percent to $15,200,000 compared to 12,000,000 The increase was primarily attributable to 20% growth from new vendors in our existing top 20 vendors in both North America and Europe, as well as a contribution from Spinnaker less the FX impact of our international business.

Speaker 3

Gross profit as a percentage of adjusted gross billings remained flat at 5.0 percent and as a percentage of net sales increased 110 basis points to 17.9% compared to 16.8% in the prior year quarter. SG and A expenses in the Q1 were $10,300,000 compared to $8,200,000 for the same period in 2022. SG and A as a percentage of adjusted gross billings decreased to 3.3% compared to 3.5%. Net income in the Q1 of 2023 increased 23 percent to $3,300,000 or $0.74 per diluted share, compared to $2,700,000 or $0.61 per diluted share for the comparable period in 2022. Adjusted EBITDA in the Q1 increased 33 percent to $5,700,000 compared to $4,200,000 in the prior year period.

Speaker 3

Again, this increase was driven by organic growth from both new and existing vendors as well as a contribution from Spinnaker. Adjusted EBITDA as a percentage of gross profit or effective margin increased 170 basis Cash and cash equivalents were $61,700,000 on March 31, 2023 compared to $20,200,000 of December 31, 2022, while working capital increased by $3,000,000 during this period. The increase in cash was primarily attributed to the timing of receivable collections and payables. We expect cash and cash equivalents to return to normalized levels moving forward. As of March 31, 2023, we had $1,700,000 of outstanding debt from the term loan that closed in April 2022, for which the proceeds were used upon certain capital expenditures.

Speaker 3

We had no borrowings outstanding under either our $20,000,000 or $8,000,000 sterling credit facilities. Stock payable on May 19, 2023 to shareholders of record on May 15, 2023. As I mentioned in our last conference call, I'd like to reiterate the recurring nature of our business. As an IT distribution and solutions company, we do not generate recurring revenue in the traditional sense of a SaaS model. However, we do generate reoccurring revenue as we continue to average roughly 85% of renewal rates with our customers every year.

Speaker 3

While the macro environment remains uncertain, we have not experienced any impact to our renewals up to this point and continue to carry this expectation moving forward. Looking ahead, our strong liquidity position continues to provide us with the flexibility to execute on both organic and inorganic growth initiatives. While our scale enables us to expand our relationship with vendor networks and customers across the globe. Regarding our M and A efforts, as Dale referred to them, and the year ahead. This concludes our prepared remarks.

Speaker 3

We'll now open it up for questions from those participating in the call. Operator, back to you and thank

Operator

and wait for your name to be announced. Our first question comes from Vincent Gucci with Barrington Research. Your line is open.

Speaker 4

Yes. Good morning, gentlemen. Nice quarter. So in terms of the your commentary related to the economy, You had mentioned no issues with renewals as of yet. Curious if there's any signs of economic impacts such as pushbacks on pricing, any changes in sales cycles or if any of your vendor categories are slowing a bit, any of that would be any response to that would be helpful.

Speaker 2

Yes. Thanks, Vince. Some of the comments come from we had our Partner Advisory Council last week. So we have big customers, small customers. We have all of our top 20 vendors.

Speaker 2

So just it's noise in the marketplace. Like I said in the commentary, there's rightsizing at some of these companies, both on the vendor side and the customer side. So maybe a little softness Like I said, we feel pretty insulated because software, so we don't have to deal with the logistics side of things. And then just the product mix that we sell, People, I think Drew mentioned that often that people are not going to not have protection under the network for their structure. So, we're just going to keep an eye on and that's why we kind of mentioned it, but we do see some stuff out there in the broader market.

Speaker 4

So, our security and data management, your fastest growing categories and I assume you expect that to continue if it is?

Speaker 2

Yes, they are the fastest. I mean, they're also very large, right? So whether when you look at the security piece of it, What we saw, cybersecurity is just a big collect all for either Security for endpoint security for your data to protect from ransomware, one of the fastest growing markets out there and the same thing in the data center space. And we cover both, but so we do a lot of data movement, data management products, when people want to get into the cloud and then they realize, you know what, I don't want to have all my critical into I want a hybrid setup, so they'll have some on prem as well or they'll do a shared local data center with another company or company. So those are definitely too fast.

Speaker 2

We still have just great hooks into the DevOps space And that's why you'll see more and more products that we signed there. And that's just unique. I think the margins potentially are better in certain areas. And we're just continuing to look. I mean, we have 6 categories that we self define that we sell into, but that doesn't limit us to say we can't.

Speaker 2

And you know what, There's another group of products that fit with us that are adjacent that we might add as another part of our portfolio.

Speaker 4

Drew, you had a nice year over year improvement in adjusted EBITDA margins. Assuming your sales momentum continues, can we expect Similar year over year improvements going forward?

Speaker 3

Yes, Vince, I think, as you know, we don't provide quarterly guidance, but I would Say that we're cautiously optimistic that the trend that we've had sequential year over year improvement will continue. To Dale's point, We have a high renewal rate. People are not going to discontinue renewing security applications that protect endpoints all the way back into the data center. We'll let slowdown potentially, but we're again cautiously optimistic, confident that we'll continue to have the growth that we've experienced over the last several quarters.

Speaker 4

And in terms of the acquisition market, Dale, have valuations improved? And if we see the economy weaken here, do you think it may make A bit more cautious or do you think you'll take advantage of better pricing?

Speaker 2

We're Opportunistic. So hopefully, it would take better pricing that's out in the market. We have both For North America, I've mentioned before. And then it's really our target is Western Europe, but there's still some in the U. S.

Speaker 2

We haven't seen a lot of change there. I think people are really focused on their internal businesses right now. Not that we haven't had the meetings, we haven't signed the NDAs. We have quite a few out there that we continue to scope out, but nothing really has changed there. Of course, we'd be looking for But then, what are we actually getting in that business?

Speaker 2

Is it really in the right space? And we're going to do it very strategically, as we've done in the past 3.

Speaker 4

Thanks for answering my questions.

Speaker 2

Thanks, Mitch. Appreciate it.

Operator

One moment for our next question. Our next question comes from Howard Root, individual investor. Your line is open.

Speaker 5

Thanks. Good morning and congrats, Dale and Drew. That's just simply outstanding quarter, this go around. Can you hear me okay?

Speaker 2

Yes, Howard, don't tell us we're boring. We know we're boring. Scott?

Speaker 5

Well, Drew gets the award for the funniest CFO, but that's a very Shower pool, so it's not standing with the same phrase. So two questions I have today. One kind of a housekeeping item, one bigger picture. The housekeeping is on The stock grant that you announced, that the company announced to you, Dale, a week or 2 ago, the 35,000 shares. And My question is not on the amount because I don't consider that to be disproportionate at all, but it's on the idea of the immediate vesting where As I see it, I think it's about a $1,300,000 G and A expense that's going to all hit in Q2.

Speaker 5

And without the vesting, it's kind of a one time Grant and it doesn't have the golden handcuffs investing over the next 3 or 4 years to keep you where we need you, which is in the CEO role there at Klein. Can you give any I know it wasn't your decision because you're the recipient of it, but can you give the relay to the Board's why that happened? How that Is this a one off deal or is this part of the compensation package because it's just very unusual in my experience?

Speaker 2

Yes, I'll And Drew can chime in as well, but it's more of a one off deal and it's really a timing issue, Howard, that this a couple of things. Let me just go back 5 years ago when the company had an entire different slate of Board members and we've done a lot of things Really on the governance side, we've created committees that weren't created before. We've done a lot of things from changing out audit firms, lawyers, you name it. And one of the things that we lacked and we took care of in 2022 was compensation committee and we brought on consultants to help us through that process. So it was really a timing catch up piece of it.

Speaker 2

It's not ideal, but we'll get through it and you won't see something like that again. It'll be More into just the regular flow and we'll share a lot of that stuff as we go forward.

Speaker 3

Yes. Howard, I would Augment Dale's commentary with a couple of things that the Board did concurrently. As Dale referenced, we the Board through the compensation committee engaged an external compensation consulting firm that was very helpful to the comp committee and the Board, Worked hand in hand with the management team to create a new compensation program that is really salary bonus, long term incentive plan that changes some of the metrics we have today and some of the timing. So there's a 3 year cliff vest that's going to be put into place with our LTIP program. And we also engaged legal counsel to help harmonize the named executive officer compensation agreements.

Speaker 3

So we pulled this all together and without getting into too much detail, there were some adjustments made to Dale's employment agreement where he gave some things back to the company and in connection with that plus rewarding him for the historical performance that I think all the shareholders would Absolutely applaud if you thought when Dale joined and you look at the stock price today, you should be extremely satisfied with the performance of the company under Dale's leadership. So there was a number of factors that went into that one time grant. But as Dale mentioned, It's not something that will occur again. And we believe with our executive employment plans in place, there are plenty of handcuffs and incentives for us to stay here and drive value for the next 5 plus years.

Speaker 5

Great. So just a follow-up on that. Am I correct, Ru, it's about a $1,300,000 expense that will hit in Q2 on that $1,000,000

Speaker 3

Correct. There will be an operating Expense that will flow through the income statement. From my perspective, yes, it's going to be an EPS reduction, obviously. But if you look at adjusted EBITDA for us, always add back share based compensation and that's not going to be recurring. So to your point, could we have done some type of multiyear vesting?

Speaker 3

Yes, possibly, but we just felt that this was the right solution from the compensation committee and the Board and Dale was I think satisfied with the end result.

Speaker 5

Okay. So that bigger picture and much bigger picture, I mean, a year ago, we were applauding you guys crossing $1,000,000,000 in adjusted gross billings and now you're Annualizing at $1,200,000,000 20 percent growth. And I was always told, trees don't grow to the sky. But yes, I don't have an appreciation for where you are in kind of reaching your market potential. I mean, that one $2,000,000,000 sounds like a big number, but you're playing in a huge industry.

Speaker 5

And so if you can take your slice of that, and just in general terms, not lasting for specific guidance, but are you in the early innings, the middle innings, the later innings of excluding acquisitions, Just organic growth with your approach and adding these 4 really focused new product offerings, say every quarter. Is it something that you can continue with this 20% growth and not reach the upper end of your market? Or are we kind of is that a it's too much to ask over the next couple of years?

Speaker 2

Yes, Howard. Here's my take and that is, if you look at the 3 competitors that we talk about, the smallest one being about $40,000,000,000 in sales. The gap between where they play and where we are is big. We couldn't double in size Without anybody even knowing who we are, other than the companies that are coming out of startup phase looking for Products into very quickly, then we're all in with them. Once they pick that route, then we'll start Putting our resources toward that.

Speaker 2

So yes, can we double and triple in size? I see that. I mean, if we look at the next 5 years, I don't see any obstacles. There's that many vendors coming out. I just can't tell you how many calls my vendor alliance My team loves to say it, we were desperate.

Speaker 2

So we are going to find anybody that could talk a mirror and say, hey, we just need to really build out our line card. Now we have them coming toward us. I think some of it's Some of the branding that we're doing that we're getting seen, some of it's just word-of-mouth by vendors. I mentioned our PAC Summit last week, it couldn't have gone better. And what we also believe is that there's a 1,000 people in the IT markets that we service And they continually jump jobs.

Speaker 2

So we follow the jockeys. This person is running VP of channels at 1 company, 2 years later, there's another one and they're like, hey, I want to work with the Climb team. This is what they did for me and I want to onboard them. So we're getting first looks instead of second looks. First looks would be the big disties and now we're getting those first looks instead of saying, hey, let's find them as well as a boutique.

Speaker 3

Yes, I would add that we've included in our investor presentation deck that's available on the corporate website, some total addressable market indicators. And if you look at the TAM for the space that we operate and it's $20,000,000,000 roughly, we're doing 1.2 You can extrapolate if we get share shift, new products as Dale's referenced and we continue to grow and do a great job for our vendor partners. Can we double and triple the size of the top line over the next 5 years? We're confident we can.

Speaker 5

Great. Very helpful. And, yes, I did buy when Dale came in and I am very happy. So thanks for the performance. Keep up the great work.

Speaker 2

Thanks, Eric.

Operator

And I'm showing no further questions at this time. I would now like to turn the conference back to Dale Foster for closing remarks.

Speaker 2

Thank you, operator, and thank you to all of our shareholders and team members that make up our Klein family and dedicated to our growth and performance. Look forward to giving an update after Q2. Thank you.

Earnings Conference Call
Climb Global Solutions Q1 2023
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