Climb Global Solutions, Inc. (NASDAQ:CLMB) Q1 2024 Earnings Call Transcript

Climb Global Solutions, Inc. (NASDAQ:CLMB) Q1 2024 Earnings Call Transcript May 3, 2024

Climb Global Solutions, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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, 2024. Joining us today are Climb’s CEO, Mr. Dale Foster; the Company’s CFO, Mr. Andrew Clark; and the Company’s Investor Relations Advisor, Mr. Sean Mansouri with Elevate IR. By now everyone should have access to the first quarter 2024 earnings press release, which was issued yesterday afternoon at approximately 4:05 PM 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 remarks, we will open the call for your 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 CEO. Dale Foster.

Dale Foster: Thanks, Sean, and good morning, everyone. We continue to make progress in growing climate, strengthening our customer and vendor relationships in the first quarter as we produced double-digit organic growth in North America, and we benefited from our recent acquisition of DataSolutions in Europe. Although we generated top solid top line growth, we experienced softer volumes across the key few vendors, primarily related to our timing – with the timing with respect to their sales cycles. This include the key vendor from our acquisition of DataSolutions in October 2023. While this adversely affected our bottom line in Q1, we expect to return to growth with these vendors over the back half of the year. As many of you are aware, our acquisition of DataSolutions, broad deep network of relationships decline as well as a robust recurring revenue base with more than 90% of its fiscal 2022 revenue coming from existing reseller partners.

We’ve already begun to take advantage of cross-selling opportunities between Climb US and Climb EMEA teams. For example, we signed global agreements with Delinea, Solar Winds, and Suzette, to name a few. Although these synergies are still in the early stages, we expect to uncover additional cross-selling opportunities as well as drive further operating efficiencies as we continue to integrate DataSolutions into our global operations. During the quarter, we deepened current partnerships with both signing new marquee vendors to our Line Card. We evaluated 32 vendors and signed agreements with only four of them demonstrating our commitment to participating and partnering with the most innovative cutting-edge technologies in the market. For example, in Q1, we expanded our partnership with Jamf.

They are a leading provider of Apple device management and security software that enables businesses to efficiently manage and secure their Apple devices, insurance, seamless integration, enhance productivity and streamline workflows. Initially, we partnered with Jamf to launch their products in Canada, but based off the strong initial results, we re-evaluated the scope to expand distribution in the United States, demonstrating our ability to successfully launch products and offer additional geographic exposure through our network of resellers. As we’ve often said in the past, we strive to build long-standing meaningful relationships with our partners. As a result, we are seeing increased exposure from targeted media coverage and industry interviews with our global teams.

In addition to receiving several notable recognitions from key vendor partners. In the first quarter, Climb was awarded Distributor or Partner of the Year by numerous vendors, including Delinea, Wasabi, Trend Micro, LogicGate to name a few. These awards are an affirmation of our strategic direction and speak to our approach to a limited Line Card. So that we can focus in going deeper with our vendor partners and truly add value to their sales efforts. We are excited to build upon the strong growth we have achieved together. Looking to the remainder of 2024, we have a solid foundation to place – in place to continue driving organic growth with existing vendors while signing new market-leading technologies to our Line Card. We expect to uncover additional synergies and cross-selling opportunities as we further integrate DataSolutions onto our operating platforms.

Our ERP implementation is also on track to go live this summer. This will enable us to drive further operating efficiencies through our global operations. We will continue to leverage our strong liquidity position to explore new acquisitions that will enhance our offerings and expand our presence in both domestic and international markets. We believe the combination of these initiatives will lead to another – to yet another year of record growth and profitability. With that I will turn the call over to our CFO, Drew Clark. I hope he will take you through the financial results. Thank you, Drew.

Andrew Clark: Thank you, Dale. Good morning, everyone. Quick reminder as we review the financial results for our first quarter, all comparisons and the variance commentary referred to the prior year quarter unless otherwise specified. Before we jump into the results, let me reiterate Dale’s comments that our positive outlook for the balance of 2024 and beyond, despite the low expectation operating results for the first quarter. As reported in our earnings press release, adjusted gross billings, or AGB, which is a non-GAAP measure, increased to 16%, which is $355.3 million for the quarter compared to $306.7 million in the year ago quarter. Net sales in the first quarter of 2024 increased 9% to $92.4 million compared to $85 million, which primarily reflects organic growth from new and existing vendors, as well as the contribution for our acquisition of DataSolutions in October of last year.

Again, as we’ve previously stated, 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 adjustments to convert AGB to net sales for financial reporting purposes under GAAP. In the first quarter, 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. DataSolutions also has a higher adjustment of AGB to net sales and their net sales were 31% for the quarter compared to our consolidated 26%. Gross profit in the first quarter increased 12% to $17 million compared to $15.2 million. Again, the increase was primarily driven by organic growth from new and existing vendors in both North America and Europe, as well as contributions from DataSolutions.

Gross profit as a percentage of adjusted gross billings was 4.8% compared to 5.0%, driven by decline in our solutions business, GP and related margin percentage and early pay in North America. SG&A expenses in the first quarter were $12.5 million compared to $10.2 million for the same period in 2023. SG&A was in line with our internal budget and sequentially from the fourth quarter. SG&A as a percentage of adjusted gross billings was 3.5% compared to 3.3% in the year ago period. The increase was primarily driven by expenses from DataSolutions, which we expect to reduce as we further integrate their business into our financial operating systems and their sales rebound in the second half of the year. Net income in the first quarter of 2024 was $2.7 million, or $0.60 per diluted share compared to $3.3 million or $0.74 per diluted share for the comparable period in 2023.

As mentioned in our earnings press release, earnings per diluted share in the first quarter of 2024 was negatively impacted by $0.01 in FX and $0.04 in acquisition fees, a portion of which related to carryover of the DataSolutions transaction as well as prospective opportunities. Adjusted EBITDA in the first quarter was $5.5 million compared to $5.7 million. The decrease was primarily driven by increased SG&A expenses related to data solutions and lower gross profit generated in the quarter relative to expectations that we expect to return in the back half of the year. Adjusted EBITDA as a percentage of gross profit or effective margin was 32.5% compared to 37.4% in the year-ago period. Clearly an unacceptable achievement, we were confident to return to target levels in the future quarters.

Turning to our balance sheet, cash and cash equivalents were $43.6 million as of March 31, 2024, compared to $36.3 million at December 31, 2023. While working capital remained flat during this period. The increase in cash was primarily attributed to the timing of receivable collections and vendor payments. As of March 31, 2024, we had $1.2 million of outstanding debt with no borrowings outstanding under our $50 million revolving credit facility. On April 29, consistent with prior quarters, our Board of Directors declared a quarterly dividend of $0.17 per share of our common stock to shareholders of record as of May 13, 2024, and payable on the 17 of May 2024. To echo Dale’s earlier comments. Our strong balance sheet provides us with great flexibility to evaluate M&A opportunities, both domestically and abroad to enhance our service and solution offerings across existing and future geographies.

We will continue to maintain a limited and very focused Line Card to ensure we are partnering with most innovative vendors in the market while also taking advantage of some scale opportunities. Our ERP implementation, coupled with further integration DataSolutions and our UK operations, will enable us to drive operating efficiencies throughout our global footprint. We believe these initiatives will enable us to grow adjusted EBITDA at a rate that exceeds our increase in adjusted gross billings. So we will keep on climbing [ph]. This concludes our prepared remarks. We’ll now open it up for questions from those participating in the call. Operator, back to you.

See also 15 African Countries with the Lowest English Proficiency and 10 Best Trucking Stocks to Buy.

Q&A Session

Operator: Thank you. [Operator Instructions] Thank you. Our first question comes from Vincent Colicchio from Barrington Research. Please proceed.

Vincent Colicchio: Yeah, Dale, so to be clear, was the light volume with certain key vendors, was that a timing issue or is it a lengthening of their sales cycles?

Dale Foster: A couple of things, Vince, and that is, if we look at the quarter, we have vendors that finish up their fiscal years in different sections. We have some of the bigger ones that actually ended in March. Sometimes they leak over, and it’s funny, we have two or three of them that are going through different ERP implementations as well, so they get kind of stuck up in that. But we had some vendor stuff that pulled into Q4, some that are pushing into Q2. So if we look at it, and then we had a large deal with our Spinnakar acquisition a year ago that didn’t reoccur in Q1. So just, if you look at the puts and takes on it, it was just back and forth, but nothing underlying. And we were talking about, as a team, of our top 20 vendors, 16 of them grew in Q1. Of our top 20 customers, 17 of them grew in Q1. The underlying piece is still very strong. It’s just the timing of quite a few of them.

Vincent Colicchio: So the – where you saw the volume softness, do you expect for the year to be on budget with those clients?

Dale Foster: We do. And as Drew mentioned in his comments, I mean, we think we’re in a strong back half of the year. Some of it’s already coming in, into our Q2 stuff that we didn’t see in Q1. And we don’t, you know, just to be, you know, open to you. We don’t push to bring things into a certain queue [ph] to make an exact number. Our vendors do, and we do. We do, you know, favors for them as far as, hey, when they need to do, as far as timing goes. So, hey, the numbers are what they are. And, you know, some of them drift into the next queue [ph] Some of them, you know, get pulled forward on that side.

Vincent Colicchio: Okay. And then the – outside of the aforementioned vendors, where there was volume, within your top 20 are you growing in line with the rest of the business better. What does that look like?

Dale Foster: Yeah, we are. I mean, of course, the newer the vendor and depending on their life cycle, you know, they’re growing at a faster rate. That’s when we talk about, you know, hey, we want to really try to get double digit growth because growth, because that’s where the emerging vendors are. As a vendor becomes more mature, there’s growth slows down in just almost every industry. So we have some larger vendors that they’re in the single digit growth, and we make it up – make up for it with the emerging ones. So that combination is what we talked about as a management team to focus and get to that over 10% rate. But if you looked at the numbers, our top line grew overall to the revenues, and it just depends on the vendor mix and then the margin profile per vendor. So it’s a lot of little, little moving parts, but that’s how we deal with quarter-by-quarter.

Vincent Colicchio: And has there been any change in areas of segment strength, technology and data center? Those continue to be the key drivers.

Dale Foster: Yeah, our two main ones our pillars are security and the data center space. So we mentioned it in previous call that, hey, we won the contract with CDW for the vast business. It’s the first time we’ve had a real big vendor move to the US that started with Spinnakar in the UK or Climb UK [ph] teams. So we’ll see that pick up in the second half of the year. We’re just getting going. We’re just getting our first orders with that. But that’s in the data center space. And then we’ll build just like we do in security. When you have somebody like Sophos in the monitoring space, SolarWinds, we’ll build a cottage [ph] industry of vendors around them that support them and that are cross sellable.

Vincent Colicchio: Okay, I’ll go back in the queue. Thank you.

Dale Foster: Thanks, Vince.

Operator: Our next question comes from Howard Root [ph] from Climb Global Solutions. Please proceed.

Howard Root: I’m not from Climb Global Solutions, Individual Investor, but thanks for taking my question. Two small ones and then a more general one for Dale. First, the adjusted gross billings, I think, went up $48 million, Q1 versus Q1 a year ago, 16%. Can you give us a breakdown of how much of that is organic and versus how much of that is from DataSolutions or any other acquisitions?

Dale Foster: Yeah, I’ll let Drew jump in. I mean, he’s got the exact numbers, but I think it’s out there. It’s probably split 50-50 or close to that.

Andrew Clark: Yeah, that’s correct. A little more. DataSolutions generated approximately $29 million in the quarter for us. Again, as Dale mentioned in his response to Vince, that was lower than our expectation. Ahead of their prior year quarter, about flat, really, with 2023. But one of our – their large vendors had some significant pull through in Q4, which obviously gave us a very strong fourth quarter result and exceeded our expectations. But unfortunately, that detracted from Q1. But DataSolutions is performing on par, so we’re excited about that. And, you know, their contribution was very meaningful in Q4 and not as impactful in Q1.

Howard Root: Okay. So, and then why do you say second half rebound rather than a Q2 rebound? And I assume that applies to the DataSolutions key vendor, mainly.

Andrew Clark: DataSolutions tend – their quarter is – second quarter is their weakest quarter historically. And then, as you know, if you look at our historical trends, Q2 tends to be one of our lower quarters as well, in terms of both top line as well as gross profit. So Q2 will be solid, but we’ll see a bigger rebound with some of those vendors, especially DataSolutions portfolio, and then the Spinnakar vendors that we acquired in Q3 and Q4. Dale, do you have other thoughts?