Q1 2024 Climb Global Solutions Inc Earnings Call

Participants

Sean Mansouri; Investor Relations; Climb Global Solutions Inc

Dale Foster; Chief Executive Officer, Director; Climb Global Solutions Inc

Andrew Clark; Chief Financial Officer, Vice President; Climb Global Solutions Inc

Vincent Colicchio; Analyst; Barrington Research Associate, Inc

Howard Root

Bill Dezellem; Analyst; Tieton Capital Management

Presentation

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 climate Global Solutions' website at www.climbglobalsolutions.com. We'll 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 Dayle, 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.
In 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 eight 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 Data Solutions 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 does include the key vendor from our acquisition of Data Solutions 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 Data Solutions, 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 AMEA teams. For example, we signed global agreements with Gilenya 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 data solutions into our global operations.
During the quarter, we deepen 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 Janssen to launch their products in Canada, but based off the solid initial results, we reevaluated 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, client was awarded distributor or Partner of the Year by numerous vendors, including Gilenya without a Trend Micro logic gate to make it 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 data solutions onto our operating platforms. Our ERP implementation is also on track to go live.
This summer, and 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 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 refer to the prior year quarter unless otherwise specified.
Before we jump into the results, let me reiterate Dave'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 Data Solutions in October of last year. Again, as we've previously stated, we focus on AGB has 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. Data Solutions 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 data solutions. 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 data solutions, which we expect to reduce as we further integrate their business into our financial operating systems and their suite 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 Data Solutions 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 were affected. 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 outstanding debt with no borrowings outstanding 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 shareholders of record as of May 13, 2024, and payable on the 17 of May 2024.
To echo Dave'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 opportunity.
Our ERP implementation implementation, coupled with further integration data solutions 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 time.
This concludes our prepared remarks. We'll now open it up for questions from those participating in the call. Operator, back to you.

Question and Answer Session

Operator

(Operator instructions)
Vincent Colicchio, Barrington Research. Please proceed.

Vincent Colicchio

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

Dale Foster

A couple of things. The Internet is when we look at the quarter, we have vendors that finished up their fiscal years and different sections. We have some of the bigger ones that actually end of the March, sometimes a leak over in funding. We have two or three of them that are going through different ERP implementations as well. So they get the kind of stuff in there. 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 Spinnaker acquisition a year ago that didn't reoccur in Q1. So if you look at the puts and takes on it was just back and forth, but nothing underlying. And we were talking about as a team, one of our top 20 vendors, 16 of them grew in Q2, one of our top 20 customers, 17 of them grew in Q1. So the underlying pieces still very strong. It's just the timing of some Q2.

Vincent Colicchio

So the way you saw the volume softness do you expect for the year to be on budget with those clients?

Dale Foster

We do have, as Drew mentioned in his comments, I mean, we think we have a strong back half of the year. Some of that's already coming in O&R, Q2 stuff that we didn't see in Q1. And we don't anticipate opening and we don't push to bring things into a certain to make a exact number of vendors do and we do do some favors for them as far as hey, when they need to do as far as timing goes so the numbers are what they are and some of them drift into the next Q, Some of them 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 here?

Dale Foster

We are of course, in the new regions and are in depending on their lifecycle, they are growing at a faster rate. That's only talk about, hey, we want to really trying to get double digit growth because growth because that's where the emerging vendors are. The vendor becomes more mature. There's been growth slows down is just almost every industry that 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, you know, to that over 10% rate. But if you looked at the numbers, you know, our top line grew overall with revenues and it just depends on the vendor mix and then the margin profile per vendor. So there's a lot of little moving parts, but that's how we do it 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

Yes, our two our two main ones are pillars in our security and the data center space. So we mentioned in the previous call that we won the contract with CDW for the bath business. That's the first time we've had a real big vendor move to the west has started with Spinnaker in the UK or climate games. We'll see that pickup in the second half of the year. We're just getting going. We're just getting our first orders with them, but that's in the data center space.
And then we'll build just like we do in security when you have somebody like sofoles in the monitoring space. So SolarWinds will build a conduit, cottage industry of vendors around them that support them that across sellable.

Vincent Colicchio

Okay, I'll go back in the queue. Thank you.

Dale Foster

Thank you, Vincent.

Operator

Howard Root, [Client global solutions].

Howard Root

I'm not from client Global Solutions, individual investor, but thanks for taking my question on i2's 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 data solutions or any other acquisitions?

Dale Foster

Yes, I'll get Drew I mean, you've got the exact numbers, but it's I think it's while it's open out there, it's probably split 50 50 as close to that.

Andrew Clark

Yes, that's correct. Out a little a little more data solutions generated approximately $29 million in the quarter for us. Again, as Dale mentioned in his response to events that was lower than our expectation ahead of their prior year quarter and about half really with 2023, but it's one of our large vendors add some significant pull through in Q4, which obviously gave us a very strong fourth quarter our results and exceeded our expectations. But unfortunately, that were detracted from Q1. But data solutions is performing on par. So we're excited about that. And their contribution was very meaningful in Q4 and not as impactful in Q1.

Howard Root

Okay. So then why do you say second half rebound rather than a Q2 rebound? And I assume that applies to the data solutions key vendor mainly?

Andrew Clark

Data solution will tend to work in the quarter is due second quarters there, weakest quarter historically. And 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 up. So Q2 will be solid, but we'll see a bigger rebound with some of those vendors especially that data solutions portfolio and then the Spinnaker vendors that we acquired in Q3 and Q4?
Dale, do you have other thoughts?

Dale Foster

Yeah. Right on track with that with the data solutions team. And just to add to that, Howard, we we integrated the sales teams early January for the data solutions and some of their, as you know, managers are running now our climb UK. team. So that team is pretty integrated at step. One of the next part of the integration is upcoming. It will be in line with our ERP that's going to roll out in July, August timeframe. And we believe by the end of this year, we'll have every company we have a lot of money.
Our systems are now But everything we've acquired in the last two years will all be under one. Andrew is running the project, but the focus is that by the end of Q3, so that we have a true Q4 on one ERP for reporting and you can imagine from three different disparate systems trying to pull those all together. It's not like we're special every company goes through it, but something that we want to get through in Q3.

Howard Root

Yes. Well, good luck with that. Once we all know how hard that is to pull off, but has to be done.
And second question kind of I've always model it kind of keeping it simple like 5% gross profit, 5% of adjusted gross billings, then SG&A below 3%. So net incomes above 2% this quarter. I think the somewhat because of the acquisition and costs there, you're at 4.8% on gross profit, 3.5% on just G&A. So net income is down at 0.8%. Are those realistic targets for the business, the 5%, 3%, 2%? Or how do you look at that or am I off on my assessment of what the number should be?

Dale Foster

Yes, I think your first modelling, it is more accurate. You know, like we said, we had a little softer than in Q1 and some of the margin profile of some of our bigger vendors. But I don't we don't see that we don't see the trend and we know is these vendors get bigger. It's the larger the vendor. There's two parts that happen. They expect there's less work to be done in the channel.
So they tried to reduce the margin profile not only for us, but also for some ripples through our reseller partners. But on the other flip side of that as a distributor reseller partner as they grow and it gets wider of their business. We're more efficient and actually transacting at. So we save the dollars on that. So it kind of goes for one for one, but that's a pretty good way to look at it. And if you look over the last couple of years, we have enough emerging vendors coming in that have a higher margin profile in that to make up for these larger ones.
And we I can just tell you, it's nonstop. We talked about, you know, evaluating 42. There's probably another 10 or 15 that we talk to that, we are just don't even get off to the next phase because they're just not ready even to have a channel target. So if it wasn't for that robust vendors just coming out of the startup phase, I would say, okay, it's going to slow down a little bit. We don't see that at all.

Howard Root

Okay, great. And then just more general and I always like to do this kind of pulling it up to 30,000 seat deal. How do you see the sales environment in trajectory? And in particular is the economy and interest rates. Does any of the macro effects going on worldwide affect you and your business in any way? And how would you see that going forward in the next year, 18 months?

Dale Foster

Yeah, I am not that smart, Howard. So on the macro side, we look at and we like it has to have some kind of impact on us. But here's what I would say is we are so small in our market space with our peers, right? If you take a look at the big three distributors are all $40 billion plus they do a lot more hardware than we did. We are software.
So we compete with divisions inside on each of those because what we're seeing, though, is the larger they get some of their vendors you have because if you look at their top 10 vendors are bringing in 90% of their revenues, you get down the line card, those vendors are not getting the care and targeted approach that we provide. So we're seeing share shift from our competitors to us in a pretty big way.
If I look at just the it was we talked about that we won an award for if you take a look at those vendors, the share shift that they're pushing to us because they're just getting a much higher touch white glove service hotels to sell their products out to the market. So on the positive side, our teams are really taking advantage of that, but we don't see the effect it could have because we're looking at a much smaller target audience. You know, we're not selling to 30,000 resellers who are selling the 7,000 globally where our competitors are doing that. So it's we just don't see it as much.
And we think we can we have a lot of levers we can pull. We have a great balance sheet so we will just go and say, hey, this is where we're going to target now we can move very quickly and put a sales team like we have on a specific vendor and capture a bunch of their business and then do the same thing. So it's much more of a tactical approach there.

Howard Root

Okay, great. So that's the good news is the economy doesn't really affect you. The bad news is it's all on you. So success and failure is on your execution.

Dale Foster

That should be right. That's the good news is someone asked me, we can make those choices. So you will take all the blame of that as well. But we feel that and we have enough feelers out there where we can actually know a little better than put your finger in the wind and say, hey, we're going to go after this market or the vendors are approaching us and saying, Hey, can you guys help us in this situation because we've had budget cuts cuts and we can actually fund you through the channel through the margin. And we'll again, we'll double down on that we've built a team with Gilenya, and they've just been a great partner for us, and you'll see those numbers continuing to grow with demand.

Howard Root

Okay, great. But congrats on the quarter 16% revenue growth, great overall year over year and the challenges come up, but you guys are addressing it. Thanks again.

Dale Foster

Thanks Howard.

Operator

Bill Dezellem, Tieton Capital.

Bill Dezellem

Thank you. A couple of questions. First of all, allow me to circle back to your February 20 press release referencing Global Technologies and the release seemed a little bit different than your typical typical release. Would you please talk about that relationship and what it means or does not mean?

Dale Foster

Yeah. Thanks, Bill. So mobile technology to the reverse supply. And we're getting asked more and more from our customer base and some of our vendors that we will have a partnership or a division that does, you know, for a diverse and secure supply chain. So we've done this. We've known the founders of global technology. They're actually also for vendors. So it's early stages, but it's some we have big customers that need that.
We're looking at a government funded that as well if you're familiar with a program, so on my background is the Fed today. So it's a government contracts are key to that. So nothing new that I can report now that, hey, we've had all these big wins, but it's definitely another component of climb that we need to have as a diverse supplier. And that's why we've built we put that relationship together.

Bill Dezellem

And so you broke up in a part of that answer. But essentially, this isn't a joint venture it's not an acquisition, but you're working together and specifically for the federal face space, is that it is that the essence now the federal piece will will come right now.

Dale Foster

It's really in our larger partners as we have a diverse supply chain. But yet it's early on those. But yes, I'm saying we're going to take advantage of the federal side of that as well. But it's still in the state and local. It's with our customer base and our vendors that are looking for a diverse diversity partner.

Bill Dezellem

Great. Thank you. And then relative to your line card of like I know in this type of a business you've experienced it before. And as have other firms, you just end up with a a vendor or a few vendors that take off in the marketplace and it and you end up being a big beneficiary of their success. So the question is how many vendors on your line card today. Do you see that you think could explode and a good way revenues are just jumping in the next year or two?

Dale Foster

If I opened up my management team we would argue over those top five or six years that we do just like when we pick a vendor, we bet on the jockey that are running that vendor with their go to market is with the channel, the same thing as far as them expanding because we've seen what they've done in the past. But then there's a lot of outside factors if you look at the majority of our vendors are not probably cash flow positive right there out of startup fees are still thinking in the grocery channel teams.
So it depends on where we get them in their life cycle. I would say right now, if it was Bill Foster and put my money on three vendors, you know, I would pick three of our vendors on it would take off on that side. And one of my sales leaders would pick three other ones, probably. So we do have a pretty good robust pipeline where we think we're going to see some real expansion.
The quickest thing in distribution is, like I said earlier, it's like a share shift piece of it, and we're seeing that happen and it's just good win. These bigger, you know, behemoths distributors, you know, just move in a little different direction or gets messy. All the advantages come to us where they need somebody that's much more targeted targeted team.

Bill Dezellem

Great. Thank you. I appreciate the help.

Dale Foster

Thanks, Bill.

Operator

Vincent Colicchio, Barrington Research.

Vincent Colicchio

Yes, one more for me, the share gains you're seeing with certain software vendors from distributors or large distributors. Are they largely quite small emerging companies? Or are they some of them of decent size.

Dale Foster

I guess it depends on what you mean by that. Vince, I mean decent size, you know, we look at a vendor if they can get to $100 million, that's that would be, you know, a new large vendor for us. If you look at, you know, Sovaldi and Harvoni solar wins $400 million, $500 million, so sort of sizable vendors on that side. But that's what I would consider is some of the larger ones, and we're seeing more of those.
Here's what happens in our market typically. And that is as these customers -- I'm sorry, vendors get larger, they look for more efficient ways to get to the market. And then the key word is how do they scale it, right? How to scale their business. We're talking to one right now that says, hey, we needed scale and we can't do it by adding another 80 sales reps. The channel already exists. So you have these thousands of resellers, you've got a handful of distributors.
If we use that channel and leverage the channel, we can scale and we don't have to keep dumping the dollars into it. So we're just getting a one for one. We actually are getting or a three x on the investment we put into the channel. So that's where we want to be that's where the inflection point is for these vendors. And we've tried to get early on with them, have a deeper relationship them. So when they go that way, we're ready to go and some of them.
There were just still prospects for us that we haven't signed yet, but we see where they're going and we're saying, hey, we're a good fit for you guys. If you look at the gap between where we sit as adjusted was doing distributed over $1 billion and the next one at, you know, $20 billion it's a big gap for us to grow there without really being I've seen, isn't that much of a competitor to the larger teams.

Vincent Colicchio

Thank you for responding.

Operator

This concludes our question and answer session. I would like to turn the floor back over to Dale Foster for closing comments that your operators.

Dale Foster

All I wanted to say thank you to all stakeholders that we continue to work with and help us build an exceptional company and really focused on the channels. We have a great team where we're going to continue to execute our strategic plan for the benefit of all our shareholders.
With that, I appreciate everybody joining us today.

Operator

Concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.