Climb Global Solutions Q2 2024 Earnings Call Transcript

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August 7, 2024

Key Takeaways

  • Climb delivered strong Q2 results, with a 31% increase in adjusted gross billings to $359.8 million, net sales up 13% to $92.1 million, net income more than doubling to $3.4 million, and adjusted EBITDA rising 48% to $6.9 million.
  • Organic growth was driven by deeper partner relationships and selective new vendor additions, evaluating 31 brands and signing deals with Automox, Flashpoint and expanding its GSA IT70 contract to include Wasabi Technologies.
  • Climb closed the acquisition of Douglas Stewart Software, adding over 20 new vendor partners in the K-12 and higher education technology channel and expecting immediate cross-selling synergies.
  • The company went live on a new ERP platform in North America and the UK (with Ireland and DSS integration planned by November), aimed at real-time data access, operational efficiency and streamlined M&A integration.
  • Climb maintains a strong balance sheet with $48.4 million in cash, no revolver borrowings, a $0.17 quarterly dividend, and remains disciplined and selective in pursuing future acquisitions aligned with its culture and strategy.
AI Generated. May Contain Errors.
Earnings Conference Call
Climb Global Solutions Q2 2024
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good morning, everyone, and thank you for participating in today's conference call to discuss Clariant Global Solutions Financial Results for the Q2 ended June 30, 2024. Joining us today are Climb's CEO, Mr. Joe Foster the company's CFO, Mr.

Operator

Drew Clark and the company's Investor Relations Advisor, Mr. Sean Mansouri with Elevate IR. By now, everyone should have access to the Q2 2024 earnings press release, which was issued yesterday afternoon at approximately 4:0:5 p. M. Eastern Time.

Operator

The release is available in the Investor Relations section of Klim Global Solutions' website at www dotklimglobalsolutions.com. This call will also be available for webcast replay on the company's website. Following management's remarks, we will open the call for your questions. I would now like to turn the call over to Mr. Mansouri for introductory comments.

Speaker 1

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.

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, adjusted net income and EPS and effective margin as supplemental measures of our 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 yesterday. I'll now turn the call over to Climb's CEO, Dale Foster.

Speaker 2

Thank you, Sean, and good morning, everyone. Our teams produced another great quarter in Q2 as we increased adjusted gross billings, net income and adjusted EBITDA year over year. These results underscore our team's continued execution of our core strategy. We continue to grow organically by deepening relationships with existing partners, signing new emerging technology vendors to our line card and delivering on our acquisition goals. As we have often emphasized, our commitment to a focused vendor line card enables us to partner with the most innovative technology companies in the market.

Speaker 2

During the Q2, we evaluated 31 new brands and signed agreements with only 3 of them. Let me briefly highlight a couple of these wins. First, we launched a partnership with Automox, a leading cloud native IoT Automation Endpoint management solution to our North American partners. With the addition of Automox, Climb can provide customers the capabilities to save time, eliminate risk and automate the patching configuration and control of all Windows, macOS and Linux endpoint systems with 1 modern IP platform. Next, we finalized our agreement with Flashpoint, a globally trusted leader in risk intelligence that includes organizations and helps organizations protect their most critical assets, infrastructure and stakeholders from security risks as cyber attacks, ransomware, fraud and physical threats.

Speaker 2

We are excited to collaborate with each of these vendors and bring their products to market, building on a mutually beneficial relationship along the way. Last month, we announced an expansion of our GSA IT70 contract with the addition of Wasabi Technologies, a market leader in hot cloud storage. Vesavi delivers low cost, high performance, secure cloud objective storage for customers that require in-depth defense approach to data protection. Climb will also offer Wasabi Surveillance Cloud on our GSA contract, which enables organizations to cost effectively scale and protect video surveillance footage in the cloud. Wasabi's layered approach to data security ensures customers' data is protected by physical and logical elements that meet or exceed critical compliance requirements.

Speaker 2

We're pleased to offer our partners in the public sector this innovation solution and look forward to adding further depth to our GSA contract in the future. Now to some real exciting news. Last week, we closed the acquisition of Wisconsin based IT distributor Douglas Stewart Software or DSS, adding complementary scale and expertise to our North American operations. This acquisition brings more than 20 new vendor partners to Climb, including Adobe, GoGuardian and Incident IQ. DSS is a proven leader in the education technology channel and provides services to more than 500 value added resellers and 250 campus stores across North America in both K-twelve and higher education markets.

Speaker 2

We're thrilled to welcome Chuck Hulan and his team to the Conn family and look forward to unlocking synergies and cross selling opportunities as we integrate DSS into our platforms in the coming months. As I have stated before, the culture and go to market strategies we have created at Climb set us apart in the market. Getting to know Chuck over the past 18 months solidifies this belief as Chuck and his team have built an excellent company that has similar core values and go to market plans as we do here at Climb. I am pleased to announce also this month that we went live with our ERP system. This new platform will significantly enhance our operations by providing better access to real time data across finance, sales and other reporting functions.

Speaker 2

The implementation of the new system represents a major step forward in our ability to drive operational efficiencies, improve decision making and support our continued growth across our global operation, particularly with new acquisitions that we will onboard to our platform. I would like to personally thank Vida Libertali, our CTO and his entire team that took on this project from the concept phase to a working system and this will only enhance our competitiveness in the market. As we enter the back half of the year, our solid foundation will enable us to continue driving strong organic growth while further improving operating leverage through the recent implementation of our ERP system. As we move into 2025, we anticipate the increased amortization expense associated with ERP will be offset through planned operating synergies in our platform. With a strong balance sheet and robust pipeline of M and A targets, we can be patient and selective as we pursue acquisitions that will not only bolster our service and solution offerings, but align with our culture and strategic goals.

Speaker 2

The combination of these initiatives will enable us to deliver on both our organic and inorganic growth objectives in 2024 and beyond. With that, I will turn the call over to our CFO, Drew Clark, to go through our financial results. Drew?

Speaker 3

Thank you, Dale. Good morning, everyone. Well, our Q2 provided some excitement for our company and team members, and it was anything but boring. A quick reminder as we review the financial results for our Q2, all comparisons and variance commentary refer to the prior year quarter unless otherwise specified. As reported in our earnings press release, adjusted gross billings or AGV increased 31% to $359,800,000 compared to $274,700,000 in the year ago quarter.

Speaker 3

Net sales in the Q2 of 2024 increased 13% to $92,100,000 compared to $81,700,000 which reflects organic growth from new and existing vendors as well as a contribution from our acquisition of Data Solutions in October of last year. At the recommendation of our team at Elevate IR, who correctly suggested, we will call out data solutions versus abbreviating to DS in order to avoid any confusion with our recent acquisition of DSS. So excluding Data Solutions, AGV increased by $53,500,000 or 19.5 percent for the quarter on an organic basis. Data Solutions generated $31,600,000 in AGV for the quarter, which was $3,000,000 or 10.6 percent greater than the prior year's quarter. Both strong indicators of our dual approach to efficiently deploy shareholder capital in our existing business as well as through acquisitions.

Speaker 3

As Dale and I frequently state, we focus on AGB as the true metric of our top line growth as the calculation of net sales is influenced by product mix and the respective adjustment to convert AGB to net sales for financial reporting purposes under GAAP. In the Q2, we had an increase in the sale of security, maintenance and cloud products, which are recorded net of related cost of sales and therefore leads to a larger adjustment from AGB to net sales. Data Solutions and our solutions business generate a higher adjustment to AGB to net sales. Gross profit or GP in the 2nd quarter increased 36 percent to $18,600,000 compared to 13,700,000 dollars Again, the increase was driven by organic growth from new and existing vendors in both North America and Europe, as well as the contribution from Data Solutions. Excluding Data Solutions, GP increased by $2,400,000 or 17.8 percent for the quarter.

Speaker 3

GS generated $2,400,000 in GP for the quarter, a significant increase over the prior year's quarter. Gross profit as a percentage of AGB increased to 5.2% compared to 5%. Moving to the expense side of the income statement. SG and A expenses in the 2nd quarter were $13,000,000 compared to $11,600,000 for the same period in 2023. Data Solutions represented most of the increase at 1,300,000 dollars SG and A as a percentage of AGB decreased to 3.6% compared to 4.2% in the year ago period, reflecting the inherent operating leverage in our business model, which will further improve with the addition of DSS and global implementation of our ERP.

Speaker 3

Net income in the Q2 of 2024 increased more than 2x to $3,400,000 or $0.75 per diluted share compared to $1,400,000 or $0.31 per diluted share for the comparable period in 2023. Adjusted net income increased 19% to $3,800,000 or $0.83 per diluted share compared to $3,200,000 or $0.72 per diluted share for the year ago period. The company's earnings per diluted share in the Q2 of 2024 were negatively impacted by $0.03 in FX compared to the prior year quarter. Adjusted EBITDA in the 2nd quarter increased 48 percent to $6,900,000 compared to $4,700,000 in the prior period. The increase was primarily driven by the aforementioned organic growth from both new and existing vendors as well as the contribution from data solutions.

Speaker 3

Adjusted EBITDA as a percentage of gross profit or effective margin increased 310 basis points to 37.3% compared to 34.2 percent in the year ago period. Turning to our balance sheet. Cash and cash equivalents were $48,400,000 as of June 30, 2024, compared to $36,300,000 on December 31, 2023, while working capital increased by $2,800,000 during this period. The increase in cash was primarily attributed to Data Solutions cash balance as well as the timing of receivable collections and vendor payments. As of June 30, 2024, we had $1,000,000 of outstanding debt with no borrowings outstanding under our $50,000,000 revolving credit facility with JPMorgan Chase.

Speaker 3

In addition, we terminated the invoice discounting facility that Data Solutions utilized as a short term financing vehicle for working capital. As of August 6, consistent with prior quarters, our Board of Directors declared a quarterly dividend of $0.17 per share of common stock to shareholders of record as of August 16 and payable on August 22, 2024. Building on Dale's earlier comments, we plan to continue driving organic growth with existing partners, while adding new innovative vendors to our Lime Card. We will also remain diligent in our M and A approach as we evaluate targets that will be accretive to earnings and fit our strategic direction. DSS is another example of delivering on our commitment to be good stewards of the capital we've been entrusted with.

Speaker 3

As noted in our press release, DSS generated $5,300,000 in EBITDA for the trailing 12 months ended June 30. Our expectation is to expand DSS' top line, implement operating expense synergies in the 1st 3 to 4 months post closing and therefore grow EBITDA. We believe these initiatives coupled with our robust liquidity position will enable us to deliver strong growth and profitability in the second half of twenty twenty four into 2025 and beyond. This concludes our prepared remarks. We'll now open it up for questions from those participating in the call.

Speaker 3

Operator, back to you.

Operator

Thank And we will take our first question from Vincent Colicchio with Bank of America Merrill Lynch. Please go ahead.

Speaker 2

Yes, Dale, good

Speaker 4

morning. Starting off, sounds like security and data center continues to be the core drivers of growth. First of all, am I correct there? And is that what you expect for the second half of the year?

Speaker 2

You are correct Vince. I just actually yesterday came in from Black Hat event in Vegas, which is growing very quickly as a conference. RSA is the premier one, but this one is quick. We have 23 of our security vendors presenting there. And then the data center, there's some lag there just because on the hardware, but not on our side because we're it's very focused.

Speaker 2

They get the hardware from different places, but it's really on the software side that we're delivering on.

Speaker 4

And it was growth broad based, did your top 20 vendors grow in line with the overall business?

Speaker 2

Yes. We thought across all of our regions as far as growth. We have self defined territories in the U. S. And the teams there can sell any products in our line card and our top 100 that we talk about.

Speaker 2

And we had growth in Q2 in every territory, all of our DMRs, the direct marketers like a CDW, SHI, except for one, I think that was more flat, but other than that growth all the way across.

Speaker 4

And then on the DSS acquisition, how long do you think it should take before you generate cross selling synergies here?

Speaker 2

It will be pretty quick. I mean, we don't we didn't really spell it out, but I mean, they lead with Adobe because Adobe is so strong in that K-twelve and higher ed space. And we have so we talked we look at these targets way on advance and get to know them pretty well and Chuck and his team. And when you look at where they're selling to, we did our own internal because one thing about distributors, we have great data for years years of both resellers and end users. So we went back and look at our dot edu and we were selling to something like 15,000 locations, unique locations in that space.

Speaker 2

Even though we don't call it out as a vertical like DSS does, we sell that many products already. So I think the cross sell to me is very good. The other side of it is that they need more vendors. Just like a lot of the smaller distributors that we acquire, they're looking for vendors that fit into their ecosystem. And we did our math with them and saying, hey, we have quite a few that fit into that.

Speaker 2

A lot of it could be in the cloud and cloud storage and backup space.

Speaker 4

And then on the data solutions side, did you achieve your cross selling synergies in the quarter? Yes.

Speaker 2

2 things there. 1 is the cross selling synergies. The other side of it is getting our teams aligned between the two groups. And we have different heads of both our original acquisition with CDF and Spinnaker and now data solutions. Those three we have different team members running different aspects of the business.

Speaker 2

So as far as integration of the teams that is all done. And then what we're finding is in the Irish market, it's easy to sign vendors and then the tough thing is to get them to expand to the UK market. So we're seeing some of that. Same thing with our vendors moving over from the U. S.

Speaker 2

I can name 2 or 3 of them that actually have moved over and that we have some success with. So it'll just continue to be an organic flow. And most of the time, it's from the U. S. To the U.

Speaker 2

K. But like I mentioned in Q1, we've had a couple that have come back this way that we actually signed in the U. S. After they were signed in the U. K.

Speaker 2

Or Ireland.

Speaker 4

Okay. And thanks for that and a nice quarter. I'll go back in the queue.

Speaker 2

Thanks Vince.

Operator

Our next question will come from Bill Dezellem with Tieton Capital. Please go ahead.

Speaker 5

Thank you. Did you mention, Dale, that you've been in discussions for 18 months with Douglas Stewart?

Speaker 2

Yes. And I any of the prospects and Bill, we talked about the targets that are out there and some of the excitement that we have as far as our growth organically is how many vendors are out there that we continue to look at and you can see this quarter looked at over 30 vendors. I was talking I was with Charles yesterday, our CMO, and he's looked at 210, I think, in the last now 8 months. There was that many coming out. And the same thing on the targets of acquisitions.

Speaker 2

Most of them are overseas. We're looking at Western Europe first, but this is one that Drew introduced us to and we started chatting and I knew of Douglas Stuart in my past life, but the closer we got to them, I'm like, this is such a great fit for us. They do a vertical into the education space when we don't really call out verticals. We consider our vertical as emerging tech and getting into the market. When they actually have emerging tech and they go into the education space and you can say, well, Adobe is not emerging, but a lot of the products and cross sellable products that we think we can sell around Adobe and build like a cottage industry, that's really what the excitement is then.

Speaker 2

But, yes, we've been talking for quite a while.

Speaker 5

And thank you for that. And would you please detail the earn out type of this acquisition?

Speaker 2

Yes, I'll let Drew jump in on that.

Speaker 3

Yes, so the earn out structure around 2 elements. The primary element is a gross profit margin target. Also, we looked at a forecast and budget. We increased that by a percentage of growth that we expected DSS to generate and they have several target levels that can get to 85%, 100%, 115% of an earn out if they achieve those gross profit margin targets. And then there's also a component of increasing EBITDA, the cash above EBITDA during a 12 month period that also is a component of the earn out.

Speaker 5

And thanks, Drew. And what's the total dollar amount that that earn out could be? What's the maximum?

Speaker 3

So if you look at the total that the max target would be about $4,200,000 I believe.

Speaker 2

Okay.

Speaker 5

Thank you. And congratulations on the transaction. Relative to the ERP implementation, was that in the U. S. Only or was that across all geographies?

Speaker 5

I'll let Drew talk

Speaker 2

to that, but we're launching our team is in the U. K. Right now as our second launch and then we have the other one coming up. But go ahead, Drew. This is Drew.

Speaker 2

Maybe him and his team have done a great job on this one.

Speaker 3

Yes. Thanks, Dale. Again, good call out for Vito and the team. So Dale mentioned, Vito and Phil from his team, Vito Lucataglia, who is our CIO, are over. They just went live in the UK on Monday, went very well.

Speaker 3

Previously, we went live in North America on July 15. We will go live in Ireland, August 5 and then Excuse me, September 5. Thank you. And then DSS probably the 1st week of November, we don't want to interrupt there, strong selling months of September October. Obviously, August July are very strong months for DSS.

Speaker 3

So by November, we'll be completely on an integrated global platform.

Speaker 5

Great. Thank you and congratulations on a solid quarter. Thanks Bill.

Operator

Our next question will come from Howard Root, a private investor.

Speaker 6

Good morning, Dale. Congratulations to you and the entire client team. Just an outstanding quarter and this looks like a probably I think maybe your best acquisition yet. We'll see the results, but congrats on that. Thanks.

Speaker 6

Two questions for me. First, kind of little things on the DSS acquisition. Is it the same and maybe I missed this, is it about the same gross margins? There's anything different in the gross margins or the adjusted gross billings in this business than your existing business kind of on a global or on an overall basis?

Speaker 2

It's very similar. They have some different rebate structure, but because they have a limited number of vendors, so the rebates will show a little bit more than ours, even though we have vendors that have similar rebates and how we get paid. They have funded heads like we have funded heads with our vendor manager team. So if you look at them, they're kind of a micro climb and they're focused, like I said, in the K-twelve sled and nonprofit space. So we pick up some great team members as we look and say, wow, this is people that already do the same thing that we do, have a lot of the same mindsets with their vendors as they go to market.

Speaker 2

So you'll see us amalgamate our teams over the next 6 months. They have some territory. They don't have a lot of field representation and similar to what was before Climb Lifeboat here. And our teams will add that to them right off the bat. So they'll all get paid on that stuff as they take their products to market.

Speaker 6

Okay. And as I look at the number you gave me about a little over $5,000,000 in adjusted EBITDA for the trailing 12 months, which looks to me like maybe a little bit around 20% of climbs. Is this about a 20% add to your bottom line? Is it immediately accretive in that way? Or how do you look at it going forward in terms of percentage increase?

Speaker 2

Right. It's immediately accretive to what we're doing. And they run a very lean team, 36 employees, similar to our data solutions in Ireland, extremely lean. They had a leading vendor of Citrix and this is a leading with Adobe. But right off the bat, you'll see the results in Q3.

Speaker 6

And I mean, just on a ballpark number, is it around it I'm not saying 20 percent increase to your bottom line, but is it about a 20% increase to your adjusted EBITDA with this addition or am I missing something there?

Speaker 2

No, you're right on. Go ahead.

Speaker 6

Okay. All right, great. Then my other question kind of as I always ask is looking at the future with the business. I mean 31% increase in adjusted gross billings, but admittedly, Q2 last year wasn't a great quarter. So it was a pretty easy comp for you, but still growing mid double digit growth in really what I look at is in terms of revenue and increasing leverage to the bottom line and now congrats on maybe early congrats, but congrats so far on your ERP implementation because that's a big obstacle with I don't see anything else.

Speaker 6

I'm not hearing anything else big in terms of added expenses coming in down the pipeline, which means more drops to the bottom line. And with a strong market for your products, do you see anything reducing the kind of linear increase that you've had in your top line and a little bit better than that increase to your bottom line as we look forward? I just want to give you an opportunity to talk a little bit about the future without giving any specific guidance.

Speaker 2

Yes. And let me talk I think maybe jump to some of the macro stuff. As we track both customers we sell to that are very large and they're public companies and also some of our competitors that are extremely large. And we I think some people try to put us in those buckets and we don't seem to track where they're tracking because they have such a hardware component of their overall sales. So when you have of course, COVID was the logistics issue with hardware and then you see some slowdown with people buying endpoint from its laptops or servers, but they still continue to buy security and that is our leader on that side.

Speaker 2

So we don't we have not followed that trend of some of the companies that reported last week. And we have looked at this quarter after quarter after quarter. So if you look at the ebb and flow that we have at Climb, it's really a vendor's performance, right? A large vendor would underperform like Q1 with Sophos. We were down with Sophos and they had some challenges with some of their ERP.

Speaker 2

So there's always some kind of reasons for it, but it's not typically a market thing. And here's what I tell my teams and I'll tell our investor community that is we have a broad enough portfolio that if and we have a lot of sales cycles. So if we're not selling in one discipline, we'll start looking in the other. Our teams are highly compensated on gross profit. So if we're not bringing in dollars, they don't get paid.

Speaker 2

So they're aggressive that way. And that model has worked for us, Howard. The model of us looking at new vendors and putting the vendors that are not performing at a high level onto our Elevate team, so we don't spend as many sales cycles or energy. And we're just keep fine tuning our model. But the other thing is we're still extremely small to the market that we sell into.

Speaker 2

So we can just change rapidly and we keep our ear to the ground as far as, hey, do we need to make some changes here? We talk about it continually. And we have both sides of it, right? The vendor side and then the like I said before, the acquisition side.

Speaker 6

Great. Thanks for that explanation. I mean, congrats and the results have been impressive. Congrats on a great quarter and keep up the great work. Thanks.

Speaker 2

Thanks, Howard.

Operator

And this will conclude our question and answer session. I would now like to turn the call back to Mr. Dale Foster for closing remarks.

Speaker 2

Thank you, operator. Thank you for all share to all shareholders. In closing, I want to thank the entire Climb team. It's been we talked about ERP a couple of years ago and we finally have implemented it. And like Drew said, we'll implement it through all our organization and will be complete by the end of this year.

Speaker 2

But the amount of hours that not only our IT team has put in, but also what we call our SMEs, our subject matter experts in each division have put in those extra time to make sure there was a successful launch. I know a lot of people in the ERP, they think, wow, this is going to be a mess. Our team has made that a very minimal amount of mess and we are off and running. So we will close out July as the first time on our new system. So with that, I appreciate everybody joining.

Speaker 2

Thank you.

Operator

And this will conclude today's teleconference. Ladies and gentlemen, you may now disconnect.

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