Software Acquisition Group Inc. III (NASDAQ:SWAG) Q3 2023 Earnings Call Transcript

Software Acquisition Group Inc. III (NASDAQ:SWAG) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Greetings, and welcome to the Stran & Company Third Quarter 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Alexandra Schilt, Vice President of Crescendo Communications, the firm’s Investor Relations. Ma’am, the floor is yours.

Alexandra Schilt: Good morning, and thank you for joining Stran & Company’s 2023 third quarter financial results and business update conference call. On the call with us today are Andy Shape, Chief Executive Officer; and David Browner, Chief Financial Officer. The company issued a press release today, November 6, 2023, containing its 2023 third quarter financial results, which is also posted on the company’s website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at 212-671-1020. The company’s management will now provide prepared remarks reviewing the financial and operational results for the 3 months ended September 30, 2023.

A close-up of a hand tapping away at a keyboard, using the company’s software to carry out a transaction.

Before we get started, we would like to remind everyone that during this conference call, we may make forward-looking statements regarding timing and financial impact of Stran’s ability to implement its business plan, expected revenues and future success. These statements involve a number of risks and uncertainties and are based on assumptions involving judgments with respect to future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond Stran’s control. With that, we will now turn the call over to Andy Shape, Chief Executive Officer. Please go ahead, Andy.

Andy Shape: Thank you, Ale, and thanks, everyone, for joining us today. I’m extremely proud to report that we generated a 42% increase in the revenue to a record $19.3 million for the third quarter of 2023, reflecting the success of our business growth initiatives. Even more notable, our gross profit increased by 50% to $6.4 million with a gross profit margin increasing to 33% compared to 31% for the same period last year. And most importantly, we achieved net income of approximately $684,000. This is a major achievement for the company. As you may — as many of you are aware, Stran has historically been a profitable company. But with our cost as a public company, coupled with our investments in the business as well as onetime costs associated with M&A activity, we reported to losses in recent quarters.

We believe our strong growth and return to profitability is a testament to the investments we have made, while carefully managing our expenses, which demonstrates both the scalability and earnings potential of our business. Moreover, we are proud to have grown organic revenue 30% to $15.4 million for the third quarter and achieved these results despite a challenging macroeconomic environment with many of our peers witnessing declining sales. We believe this demonstrates our strong competitive position and increased market share. We expect the growth trajectory to continue throughout the remainder of the year as, historically, the fourth quarter has always been our strongest in terms of sales as customers utilize the remainder of their annual marketing budgets and with the holiday season upon us.

We believe our revenue growth is a direct result of executing on our business growth strategy, which has included aggressive M&A landing, expanding our customer contracts as well as effectively streamlining operations. Regarding M&A, we have completed a meaningful acquisition, including G.A.P. Promotions, Trend Brand Solutions, Premier NYC and TR Miller, all within less than 2 years. Each has brought important strategic advantages to Stran and our operations, including expanding our geographic footprint; increasing our warehousing and manufacturing capabilities; and bringing elite clientele to our already impressive roster of clients. I’m pleased to report that for all 4 acquisitions are now fully integrated into our operations, and we’ve seen a seamless transition into Stran.

While these acquisitions did come with the integration costs and other onetime expenses, we are witnessing the benefits of our strategy. We expect profitability of each of these businesses will continue to increase over time. As I’ve mentioned, M&A has been an integral part of our growth strategy as the promotional products industry is ideal for consolidation. And while we will not move away from exploring M&A opportunities as they arise, we are focusing on organic growth and maximizing the potential of our completed acquisitions while expanding into new verticals and geographies to support our growth. Moreover, our expanded sales and marketing programs are positively impacting our pipeline. In fact, we have secured multiple contracts with both new and existing customers, including our recently announced 6-figure contract with a leading medical group that specialize in the treatment of gastrointestinal disorders.

This new customer has over 200 locations throughout the United States and over 3,000 employees. We’re in the process of launching a new marketing program for this customer, and we’ll also be providing holiday and recruitment gifts as well as new hire kits to its employees. We believe this contract is further validation of our ability to address the needs of our customers regardless of industry. In addition, we expanded our relationship with an existing customer and have launched a loyalty redemption program for them. We support this online sports entertainment client through a combination of physical and experiential rewards designed to drive behavior. This program is example of one of several such programs based on our e-commerce loyalty program platform, which supports all aspects of client and consumer engagement from product ideation to production, technology, logistics, inventory management, fulfillment and reporting in order to ensure a seamless experience for both the client and their consumers.

We received more than 22,000 orders in the first week alone from this program, generating over $2 million in sales. The maximum number of orders from this program is approximately 45,000 units for a total sales of approximately $4 million. We look forward to further executing this program for our client and exploring implementation of similar programs with other clients as well. We also continue to launch new online stores for our customer and now actively managing over 280 online customer stores. These provide long-term value for our customers as well as an easy and simple access to these products. In addition, we are continually being recognized in industry, and I’m honored to jump 21 places to 24th in advertising specialties institutes 2023 annual listing of the most powerful people in the promotional products industry, which follows our top 40 rankings as well.

ASI serves the network of 25,000 suppliers, distributors and decorators in the $25.8 billion promotional products industry and being acknowledged within their awards validates our progress, including accelerated revenue growth and our ongoing business efforts to become a leader within the industry. Furthermore, we are continuing to enhance our technology capabilities. And as previously discussed, we are actively working to fully implement NetSuite into our operations along with additional e-commerce incentives using Adobe’s e-commerce platform, Magento Open Source. We believe that our overall technology strategy and investments will continue to improve the overall efficiency of our business. Reflecting our confidence in our financial positions and the outlook of the business, we have resumed our stock repurchase program.

As of September 30, 2023, we have repurchased approximately $3.4 million worth of stock over the course of the program. While there are limitations as to how many shares we are allowed to repurchase at any given time, we believe the stock repurchase program can be an effective tool to drive long-term shareholder value given the volatility in the capital markets. We’ve also reported that members of the management team have purchased Stran stock in the open market as filed with the SEC. Overall, we have and continue to execute a well-designed growth strategy, which has resulted in profitability for the third quarter of 2023, along with new contracts, enhanced business operations and new technology offerings. We remain committed to our growth strategy, which we believe will secure our position as a leader within the $25 billion promotional products industry.

At the same time, we have preserved a strong balance sheet with $19.7 million in cash and investments as of September 30, 2023. This provides us with the flexibility to explore strategic opportunities as they arise. So to wrap up, we plan to continue to apply our growth strategy by innovating and investing in technology, initiating marketing efforts to help deepen and develop client relationships and selectively pursuing acquisitions to sustain our growing operations. At this point, I’d like to turn the call over to our Chief Financial Officer, David Browner, to go over the financials in detail. Please go ahead, David.

David Browner: Thank you, Andy. Revenue increased 42% to approximately $19.3 million for the 3 months ended September 30, 2023, from approximately $13.6 million for the 3 months ended September 30, 2022. The increase was primarily due to the higher spend from existing customers as well as business from new customers. Additionally, the acquisitions of the assets of each of the G.A.P. Promotions in January 2022; Trend Brand Solutions in August 2022; Premier NYC in December of 2022; and TR Miller in June 2023, respectively, accounted for an aggregate of approximately $13.9 million or 20.4% of sales for the third quarter of 2023 compared to approximately $1.7 million or 12.6% of sales for the third quarter of 2022 from the acquisitions of G.A.P. Promotions assets in January ‘22 and the acquisitions of Trend Brand Solutions assets in August of 2022.

Recurring organic sales defined as sales, excluding revenue from the acquisition of assets of each G.A.P. Promotions, Trend Brand Solutions, Premier NYC and TR Miller, increased 29.5% or approximately $3.5 million to approximately $15.4 million for the 3 months ended September 30, 2023, compared to approximately $11.9 million for the 3 months ended September 30, 2022. Gross profit increased 50% to approximately $6.4 million or 33% of revenue for the 3 months ended September 30, 2023, from approximately $4.2 million or 31.3% of revenue for the 3 months ended September 30, 2022. The increase in the dollar amount of gross profit was due to the increase in sales, partially offset by an increase in purchasing and freight costs. Net income for the 3 months ended September 30, 2023, was approximately $0.7 million compared to a net loss of approximately $0.7 million for the 3 months ended September 30, 2022.

This change was primarily due to an increase in sales during the 3 months ended September 30, 2023, partially offset by an increase in operating expenses. At September 30, 2023, the company had approximately $19.7 million of cash and investments and no long-term debt. At this point, I’ll turn the call back over to Andy.

Andy Shape: Thank you, David. We’re extremely proud of the progress we have made to date, resulting in profitability, new contracts and increased exposure of Strong. We look forward to witnessing additional benefits from our growth initiatives and we’ll provide additional updates as they unfold. I’d like to thank you for joining the call today. At this point, we’d like to open up the call to questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question is coming from [Nick Pincus] with Forest Capital.

Unidentified Analyst: First, congrats on a very strong quarter and the return to profitability. It looks like you’ve done a good job integrating the acquisition. The company is generating very strong organic revenue growth. So my question is, do you think that the company will be able to maintain profitability on a consistent basis going forward? And given the strong balance sheet, what do you plan to do with the cash flow we’re generating now?

Andy Shape: Yes. So good question. First, in terms of the M&A, yes, we’re proud of integrating those businesses within our organization. So as we talked about, we’ve done four of them. we’ve integrated them, and we — the goal when we do acquisitions is not just to acquire companies and hope that we can retain a good portion of it. The goal of that is to grow that. And that’s one of our focuses right now is to turn them accretive immediately. So your question about return to profitability. We are looking to sustain that long term. That is part of our goal, 2024, looking forward, Q4 as well as looking forward to 2024, is returning to a consistent long-term profitability for the business. When we went public — the goal when we went public was to raise capital to grow our business.

I think that we’ve done a good job at doing what we promised to do, which is grow organically, look at acquisitions while trying to remain as profitable as possible. It’s taken us a little longer to get back to that profitability while we have grown — seen significant growth, essentially almost doubled in the last year approximately or 1.5 years. So we feel like we’ve done a very good job, and we’re looking forward to continuing making profitability a long-term goal for us so that we can increase our cash position over time through business operations, creating more capital that will make our balance sheet even stronger.

Operator: Our next question is coming from [Barry Pasternack] who is an investor.

Unidentified Analyst: Congrats on the quarter. Andy, I think you mentioned in the prepared remarks that bookings were looking good. I just was wondering if you could talk a little bit more about what you’re seeing in bookings for the — playing out over the next couple of quarters?

Andy Shape: Yes. So we’ve seen — in terms of bookings that we’ve seen strong bookings, obviously, fourth quarter is typically our largest quarter and we’re expecting this year as well. Looking into 2024, macroeconomic trends, we’re not — obviously, we don’t have too much visibility into that well into 2024. But we have not necessarily seen as much of a slowdown as potentially expected. So we’re looking very forward to 2024. We have heard within our industry from others that we’ve spoken to that business maybe a little soft and people are preparing for not necessarily as much revenue as expected. But I feel like we’re in a very good position because we’re not slowing down in terms of our sales and marketing efforts to track new customers.

So we’re very positive for that. Bookings are very strong for fourth quarter already. So we’re positive for the fourth quarter. As we look into 2024, we also feel like we’re in a very good position to capitalize on that as much as anyone as well as our strong balance sheet allows us to capture business where others may not be able to be as competitive or be able to keep up with some of the growth that they needed for some of their clients. So we’re looking very positive looking to 2024.

Unidentified Analyst: Okay. Great. And also, if you could just comment on the acquisition pipeline and how you guys are thinking about the timing of maybe the next acquisition if you’re — I know you said that the existing or prior acquisitions, they’ve all been digested and integrated, but does that mean that you would be ready to make another acquisition now? Or you’re looking at a little bit further down the line to make another acquisition? And what does the current acquisition pipeline look like?

Andy Shape: So the pipeline — the acquisition pipeline that we have is really — I don’t want to say never ending, but there’s over 25,000 potential targets that we could look at. So there’s — the pipeline is — the supply out there well exceeds any demand that we could ever absorb. So we’re being very selective about, a, who we’re going after and why? Again, looking at geographical footprints as well as anybody who has complementary business or someone who maybe under serving their clients where we can go and identify them and really grow that. So we’re being very much more selective as well as we want to see what happens with the next few months of any companies that maybe have struggled financially. And with interest rates being where they are, we want to see if there’s any type of opportunity for us potentially to find a very good deal out there for a strong business that may just not be able to support that financially.

So we’re being a little bit more patient than we had in the past for multiple reasons, one, being macroeconomic trends. And two, we’ve made investments both financially and from a resource standpoint into the companies that we’ve already acquired. And we don’t want to squander that by losing our focus. We really want to go and invest into those businesses, maximize them because there’s tremendous potential within their client base to expand that even further where we’ve seen that, especially with TR Miller, most recent that we closed in June, had historically in the mid-teens, $15 million to $20 million in revenue. We want to go maintain that and make sure that we capture that and turn that even more. So our real focus right now is on our organic business and our business that we have right now, but we are in active discussions with multiple customer — competitors about potential acquisitions when they make strategic sense.

But we’re not — there’s nothing on the very near horizon that we can report other than being very strategic about it. We’re capitalizing where we feel like it makes sense for our business and, obviously, for our shareholders.

Operator: [Operator Instructions] Okay. We have no questions on the line at this time. So I will hand it back to Mr. Shape for any closing comments you may have.

Andy Shape: Thank you, everybody, for joining. As mentioned, we’re very proud of the progress we’ve made growing our sales while remaining profitable and achieving the profitability levels that we think we can extend into Q4 and long term for the company. So thank you, everybody, for your commitment to Stran, believing in what we’ve been doing and look forward to showing what we can continue to deliver into the future. Thank you very much, and enjoy the day.

Operator: Thank you. This concludes today’s conference and you may disconnect your lines at this time, and we thank you for your participation.