Climb Global Solutions, Inc. (NASDAQ:CLMB) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good 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 Adviser, Mr. Sean Mansouri with Elevate IR. By now, everyone should have access to the first quarter 2023 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 available for webcast replay on the company’s website. 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.

Sean Mansouri : 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.

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-K we furnished to the SEC yesterday. I’ll now turn the call over to Climb’s CEO, Dale Foster.

Dale Foster : Thank you, Sean, and good morning, everyone. As you can see, our momentum from 2022 record year has carried into our first quarter 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 Spinnakar, which we acquired last August of last year. Excluding Spinnakar, 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.S. and abroad. On the 18 vendors 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 LogicGate, a vendor that was first part of the Spinnakar portfolio of vendors. They are a leading provider of transformative risk and compliance solutions delivered on the Risk cloud platform. We look forward to growing our relationship with LogicGate, as we continue to scale our business globally. As many of you are aware, M&A will continue to be an important component of our growth strategy as we continue to evaluate potential targets that would extend our geographic reach as strategic vendors as well as enhance our Climb team. We began this initiative in 2020 with the acquisition of Interwork Technologies, a Toronto-based value-added specialty distributor, followed by the acquisition of CDF Group, a U.K. cloud software, IT distributor and service provider.

As I mentioned earlier, last August, we completed the acquisition of Spinnakar, another U.K.-based IT channel distributor focused in the EMEA region. These are accretive transactions — these accretive transactions have not only extended our geographic reach beyond United States, but have also enabled us to reap the benefit of cross-selling opportunities between each entity in each region. This further reflected in our recent entry into the French market with Spinnakar’s relationship with VAST Data. We expected — 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, could lead to a 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. Looking towards 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&A targets, we continue to be selective as we pursue acquisitions that will not only be accretive to our business, but will align with our culture and strategic goals. We expect the tone for 2023 with a strong first quarter 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 will take you through the financial results. Drew?

Andrew Clark : Thank you, Dale, and good morning, everyone. Dale gets the exciting content, and I get the boring. As we discuss our first quarter financial results, I’d like to remind everyone that all comparisons and variance commentary refer to the prior year quarter, unless otherwise specified. So let’s get started. Q1 results marked our eighth consecutive quarter of double-digit profitability improvement. We are qualified or 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% to $306.7 million compared to $238.7 million 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 Spinnakar, which closed in August of last year.

In addition, net sales in the first quarter of 2023 increased 19% to $85 million compared to $71.3 million, which reflects double-digit organic growth from new and existing vendors as well as a contribution from Spinnakar, offset by a slight reduction due to the impact of FX. Gross profit in the first quarter increased 27% to $15.2 million compared to $12.0 million. The increase was primarily attributable to 20% growth from new vendors and our existing top 20 vendors in both North America and Europe as well as a contribution from Spinnakar less the FX impact of our international business. Gross profit as a percentage of adjusted gross billings remained flat at 5.0%. And as a percentage of net sales increased 110 basis points to 17.9% compared to 16.8% in the prior year quarter.

SG&A expenses in the first quarter were $10.3 million compared to $8.2 million for the same period in 2022. SG&A as a percentage of adjusted gross billings decreased to 3.3% compared to 3.5%. Net income in the first quarter of 2023 increased 23% to $3.3 million or $0.74 per diluted share compared to $2.7 million or $0.61 per diluted share for the comparable period in 2022. Adjusted EBITDA in the first quarter increased 33% to $5.7 million compared to $4.2 million in the prior year period. Again, this increase was driven by organic growth from both new and existing vendors as well as a contribution from Spinnakar. Adjusted EBITDA as a percentage of gross profit or effective margin increased 170 basis points to 37.2% compared to 35.5% in the year-ago period as we continue to see operating leverage in our business.

Turning to our balance sheet. Cash and cash equivalents were $61.7 million on March 31, 2023 compared to $20.2 million on December 31, 2022, while working capital increased by $3 million 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 $1.7 million of outstanding debt from the term loan that closed in April 2022 for which the proceeds were used upon certain capital expenditures. We had no borrowings outstanding under either our $20 million or GBP 8 million in credit facilities. Subsequent to quarter end and consistent with prior quarters, our Board of Directors on May 2, 2023, declared a quarterly dividend of $0.17 per share of our common 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. 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&A efforts, as Dale referred to them, we will continue to evaluate targets that we can enhance our geographic footprint in addition to our service and solution offerings. We look forward to delivering another year of growth and profitability in the year ahead. This concludes our prepared remarks. We’ll now open it up for questions from those participating in the call. Operator, back to you.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Vincent Colicchio with Barrington Research.

Operator: Our next question comes from Howard Root, Individual Investor.

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.

Dale Foster : Thank you, operator, and thank you to all of our shareholders and team members that makeup of our Climb family and dedicated to our growth and performance. We look forward to giving an update after Q2. Thank you.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.