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Executives

Melanie Caponigro - Investor Relations

Simon Nynens - Chairman and Chief Executive Officer

Dan Jamieson - Vice President and General Manager, Lifeboat

Shawn Giordano - Vice President, TechXtend

Tom Flaherty - Chief Financial Officer

Analysts

Chris Parker

Wayside Technology Group, Inc. (WSTG) Q1 2013 Earnings Conference Call April 26, 2013 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to Wayside Technology Group Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. Please note that all callers are limited to one question each. (Operator Instructions) As a reminder ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today’s conference, Melanie Caponigro. Ms. Caponigro, you may begin your conference at this time.

Melanie Caponigro

Thank you, and good morning. Welcome to Wayside Technology’s first quarter 2013 earnings call. Before turning the call over to Simon Nynens, the company’s Chairman and CEO, I will dispense with the customary cautionary language and comments about the webcast for this earnings call. We released earnings for the first quarter at approximately 5 PM Eastern Time, Thursday, April 25, 2013. The earnings release is available at the company’s Investor Relations website at waysidetechnology.com.

Today’s call including all questions and answers is being webcast live and can be accessed via the website, earnings.com. A rebroadcast of this call will be available at waysidetechnology.com. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, April 26, 2013. A detailed discussion of risks and uncertainties are discussed in our Forms 10-Q and also in greater detail in our Forms 10-K. Wayside Technology Group Inc. sees no obligation to update and does not intend to update any forward-looking statement.

Now, I would like to turn the call over to Simon Nynens.

Simon Nynens

Thank you, Melanie and good morning to everybody. We are pleased to report solid quarterly results as compared to Q1 2012’s exceptional revenues and considering the persistent downward price competition in the distribution segment. Our Lifeboat Distribution segment delivered solid results as it continued to execute on a strategic plan. Our TechXtend segment revenues were down compared to an exceptionally strong Q1 last year, which benefited from strong level of extended payment term sales transaction businesses in such prior period.

Regarding our balance sheet and share price, if you add up our cash, marketable securities and long-term receivables, which is basically cash that we invested in financing our customers and is earning interest, you arrive at a balance of about $22 million, which is 68% of our equity. If you look at our market cap right now, this amounts to about 40% of our market cap. So, if you deduct the cash, marketable securities, and long-term receivables from our market cap, you end up with a market cap of around $33.5 million, and that for a company that generated income from operations of $8.5 million in 2012 and pays out the dividend of $0.64 a year.

Now, what is it that we do? We provide easy access to the right IT products. And in addition to our electronic license delivery systems, our outstanding customer service levels, and our dedicated sales staff, this is what truly sets us apart. As we continue to explore, define, and build our competitive advantages, we continue to invest in our company. We have the tools in place to add more publishers, including a great team and a great IT infrastructure. And although we cannot influence the larger economic forces that are at work, we do look forward with great confidence in our team and in the rest of the year.

Now, I would like to hand it over to Dan Jamieson, our Vice President and General Manager of our Lifeboat division. Dan?

Dan Jamieson

Thank you, Simon. Lifeboat’s Q1 2013 results reflect positive year-over-year growth in revenue and a flat year-over-year result in margin. The key factors in Lifeboat’s Q1 revenue growth with the successful penetration and expansion of pivotal software lines within a variety of Lifeboat’s premier reseller accounts the LARs, the large account resellers and DMRs, the direct market resellers. Along with the success from expansion of business within targeted solution providers’ accounts including VARs, the value-added resellers, SIs, the systems integrators, and other consultancy type companies.

The flat margin result is primarily attributable to continuing margin pressure across key vendor lines and in the distribution segment. Lifeboat signed 8 new distribution agreements in Q1, 2013. These new agreements will strengthen Lifeboat’s portfolio and enhance our focus in our go-to-market concentration areas, including virtualization, security, application lifecycle management, database infrastructure, application and network infrastructure, and business productivity. Thanks Simon.

Simon Nynens

Thank you, Dan. And now, I would like to hand it over to Shawn Giordano, our Vice President of our TechXtend division. Shawn?

Shawn Giordano

Thank you, Simon. The TechXtend sales team delivered solid results in the first quarter of 2013 after an exceptional Q1 in 2012 which included significant growth in both our extended terms transactions as well as our solutions focus business. Our sales team continues to deliver value to our customers in the areas of virtualization in cloud, storage and data management, business intelligence and information management. Our continued focus on building long-term relationships with our clients and acting as trusted advisors enables us to help our customers to achieve business efficiencies by leveraging best of breed technologies. We believe our ability to deliver easy access to the right IT products is what sets us apart from our competitors. In conclusion I would like to thank all of our back office and support teams, without their hard work our success is not possible.

Simon Nynens

Thank you, Shawn. I would like to now hand it over to Tom Flaherty, our CFO. Tom?

Tom Flaherty

Thank you, Simon and good morning to our investors, analysts, employees and friends. I will discuss our first quarter financial results both on a consolidated basis as well as by segment. Net sales for the first quarter of 2013 were $66 million. This is compared to $66.9 million in Q1 last year representing a 1% decrease on a consolidated basis.

Sales for our Lifeboat Distribution segment were $59.3 million compared to $49.3 million last year representing a 9% increase. This increase was mainly a result of strengthening of our account penetrations, our continued focus on expanding virtual infrastructure-centric business and the cumulative impact of key profit line additions.

Sales for our TechXtend segment were $12 million compared to $17.6 million last year, representing a 31% decrease. The 31% decrease was primarily due to a decrease in extended payment term transactions as compared to exceptionally strong extended payment term sales in the first quarter ended March 31, 2012.

On a consolidated basis, our gross profit was $5.3 million compared to $5.6 million for the first quarter of 2012 representing a 5% decrease. Our gross profit margin was 8.1% compared to 8.3% last year. Lifeboat Distribution’s gross profit was flat as compared to last year. Although Lifeboat Distribution’s net sales increased, its gross profit remained consistent due to a decrease in its gross profit margin. Lifeboat’s gross profit margin was 7% as compared to 7.7% last year and was impacted primarily by continued pricing pressures within this segment.

Our TechXtend segment’s gross profit decreased by 14%, however, gross profit margin was up at 12.7% as compared to 10.1% last year. The decrease in gross profit dollars and the increase in gross profit margin was primarily due to lower volume of extended payment term deals which are typically at lower gross profit margin as compared to non-extended payment term deals.

The company monitors gross profits and gross profit margins carefully, price competition in our market persisted in the first quarter of 2013 with competitors lowering their prices significantly. The company immediately responded and as a result our gross profit margins were negatively impacted. We anticipate that margins will continue to be affected by this current trend. And in addition, we anticipate a recent trend of decreasing vendor margins and discounts will continue to negatively impact gross profit margins.

Total selling, general and administrative expenses were $3.9 million compared to $4 million in Q1 of last year. The decrease in SG&A is primarily the result of a decrease in commissions and bonus expense which are based on gross profit offset by an increase in salary and related expenses due to increased headcount in sales, finance and operations to support our business growth.

Our net income for the first quarter was $1 million. Our Q1 interest tax expense – income tax expense was lower primarily due to a change in the state of New Jersey enforcement rules which lowered our state tax rate as compared with the prior year. Our earnings per share on a fully diluted basis, was $0.22 per share.

Moving on to the balance sheet, compared to our balance sheet at December 31, 2012, the following key accounts had fluctuations. Cash and marketable securities was a healthy $13.6 million at March 31 compared to $14.2 million at December 31. This decrease is comprised primarily of $780,000 of positive cash flow from operations offset by dividend payments of $750,000 and $512,000 repurchases of treasury stock.

The cash receivable, current and long-term, decreased by 23%, and this was due to a decrease in our sales volume during Q1 as compared to Q4, 2012, and our Q4 is typically our strongest sales quarter of the year. Accounts payable and accrued expenses decreased by 30% due to a decrease in purchases to support lower sales volume in Q1 as compared to Q4, 2012. Because we believe our stock price is undervalued during the quarter, we repurchased approximately 42,000 shares of our common stock and still have authorization to buyback approximately 312,000 shares.

Our stockholders’ equity now stands at $32 million and cash mix up 42% of equity. Working capital at the end of the quarter amounted to $23 million. At our April 24 board meeting, the Board of Directors declared a $0.16 dividend per share for our common stock payable on May 17 to shareholders of record on May 7.

In conclusion, the company continues to have solid operating results with strong balance sheet and is adequately capitalized to support our continued growth plans. I want to personally thank all of our employees and especially the staff in the finance and HR departments for their hard work and dedication. Simon, back to you?

Simon Nynens

Thank you, Tom. Now, before we start with the Q&A session, a couple of more comments and also there was a question e-mailed to us, the person could be on the call, but I think more people would have this question and saying what about the European sales office, what about the Canadian sales office, and is there feasibility to continue European sales office? With regards to our European sales office, our European sales actually went up in the first quarter. It’s still relatively small compared to our overall sales. It’s about – our overall sales if you look at international, it’s as a percentage of revenue it’s about 16% versus the Q1 of 2012 17%. And it’s about $12 million versus $11 million this year. The main reason for that decline is the decline in our Canadian sales. Canada, as you can also see the reports from other distributors, the overall IT, the environment was depressed.

In addition, especially in our sector, we got hit hard with both – we lost some lines, and there was significant pricing pressure. So, that is something that we have to closely monitor for the remainder of the year. And we have put an action plan in place to get that business back and grow our business in Canada. So, that is definitely on our plan to address in Q2. On the European sales office in and of itself is doing good, compared to last year. We continue to monitor that very closely. It’s profitable, and we also have a little part of our APAC business out of that office, and we continue to be excited about the growth opportunities internationally, including Latin America and the APAC region, so that with regards to our European sales office now.

And if you would ask me okay, what went wrong, what went right in this quarter? I’ll give you a two-minute answer, I would say we had despite the overall economic environment, Lifeboat U.S. performed well, was held back in part by the decrease in the marketing spend of publishers and increased focus on return on investment from software publishers both in marketing and in rebates. So, that was – that’s something that we hope to address in the remaining of the year with the planning events coming up with creative ways to market their products to their end customers and reap some of those benefits. So, what went well? The U.S. sales were good. Canadian sales were below expectations. European sales were small – relatively small increase. We were held back by marketing rebates and the continued pricing pressure. I hope to address the marketing during the remainder of the year, something that I feel is going to linger on, but there has been nothing new as the continued pricing pressure.

With regards to TechXtend, the majority of the business that if you compare Q1, 2013 versus 2012, we actually penetrated our accounts more often than the first quarter of last year, so the repeat sales are up, that’s good news. Bad news is that we didn’t have those large finance as many of those large finance deals as we had last year.

Now part of that we hope that will fall into Q2, a part of that is that was in the pipeline and that will fall into April. However, right now we don’t have any visibility in terms of what are the deals that we close, because majority of these deals we closed in last two weeks of the quarter. So, we don’t have any risibility in terms of how it’s going to look June versus June. April 2013 versus April 2012 is looking stronger right now in terms of the finance deals. So, I am constantly optimistic that we can reach some of that, we can get some of that business that we lost in Q1 and Q2. However, I don’t want to make any forward-looking statements as it’s really early in the quarter. And our business as I said many times before is really dependant on the business that we book in the last two weeks of the quarter.

Now with that said I would like to thank our vendors, the software publishers for their trust and partnership. We are flexible, proactive and knowledgeable partner, who acts like an extension of vendor sales and marketing team. We remain focused on adding new publishers providing our customers with excellent customer service and providing our employees with a great and rewarding working environment.

Having that said, just yesterday night we were selected as one of New Jersey’s best companies to work for. Extremely pleased about that reward back from our employees in that recognition. We are going to issue a press release next week, but it’s something that we are all here extremely proud of. And having that said we look forward with great confidence in the people who make these results possible and that’s our team here at Wayside Technology Group. To all of them, I say thank you for your hard work during this past quarter and thank you for your continued passion to win.

Thank you, operator and we can now start with the Q&A session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We have a question from (Chris Parker).

Chris Parker

Yes, Simon and everyone else good morning, I am a long-time shareholder and want to recall a few years ago when VMware was a big product of yours and it got commoditized, and I think you did an exceptional job one of the best business transformations I have seen of rebounding from having one of your main cash counts commoditized and really transformed the business.

Simon Nynens

Thank you, sir. I appreciate that feedback.

Chris Parker

You’re welcome. It seems that maybe now you are – we are working harder and harder to tread water and hiring more headcount, but that’s not really resulting in increased sales or profits. And I am just wondering if there is any transformation or fix in the works for that where you think you could do something like you did when VMware was commoditized. And the second part to the question is in lieu of that, if there isn’t some action there, is it possible to use some of the balance sheet assets to either increase the dividend or maybe it’s even smarter to increase share repurchases, which would decrease the cost of funding the dividend. So, maybe leveraging some balance sheet assets to more share repurchases would help with increasing the dividend later, making it less costly?

Simon Nynens

Right, right. First of all, thank you for your complements, really appreciate that I am sure the team here we’ve worked hard to accomplish that. It was not a secret sauce, it’s as blocking and tackling and its adding more publishers. And it’s really investing in people long-term. If you look at the first quarter of 2013, I am still pleased with the results considering if you look at our results in terms of income from operations and you compare that to equity – return on equity is high. And we continued to pay that dividend. In terms of the business transformation, internally we say it’s our – we just had our take off event and surpassed to $1 billion. We definitely we strive to win from our competition and then the main reason for that is we see ourselves as providing easier access to IT products than our competition does. So, what kind of business transformation does that mean for us going forward? I think we have to – the two-pronged approach for TechXtend business is to continue to have these large financial deals, to grow those, in addition to really start not only selling the products, but with consultative approach making sure that these people come to us for more and more products. And that’s our approach, however, that is not something that is done in two or three weeks that’s going to take time.

And if you look at the costs for TechXtend division in the first quarter and you will see that they are actually up whereas our sales were down. Now we could start cutting headcount and to get to our financial results. However there were some real investments made in a consultative approach hiring more people with technical knowledge as well as hiring people with specific sales skills in specific sectors and more specifically the government sector. Now that has not resulted in significant sales yet in the first quarter, but we believe that is a great investment and we need to continue that investment, we expect to see results from that later this year.

With regards to Lifeboat Distribution, you’re absolutely right the VMware got commoditized and we got out of that game and we said let’s try not to replace one large publisher with another large publisher, but let’s try to replace them with five or 10 publishers. And let’s try to really bet on people who do well to us and we are going to do well to them. What is happening now in the overall industry is definitely that pricing pressure and the main reason for that is that you can only be as smart as your dumbest competitor. And right now lot of mainstream distributors are hardware-focused still enormously dependent on hardware. That business is declining significantly as all the press releases have shown us – you and us.

So, they see software as the new hold – okay, this is going to save us, let’s go out there. And unfortunately what unprofessional people do immediately is drop the price. We can therefore only follow. Now, there is two things that you can do, you can say I am out of that game and be out or you can say I’m in this game and I’m going to play a smarter game then they are. And the reason that we’re able to go in and follow with the price and increase our gross margin because that is the ultimate goal here is the fact that we work smarter. We know what we sell and people like that customer service.

Now does that mean that they are going to pay 2% more margin than they would pay a broad stream, no they do not, but it is getting stickier to business, so they will stay with us. The way for us to grow and I’m very, very convinced that this is the way to grow, its not a secrete sauce it’s to add more publishers. And we can try to get more out of our current publishers, but that’s not going to – realistically that’s not probably going to happen.

Now we’re trying to offer alternative services such as we do complete website processing orders. If we go to intel.com and you click on buy software, we handle the complete back office for that. We can – we offer alternative services, we offer leads follow-up. But we also are looking to add more publishers and that’s really the key here. We know that as a percentage the gross margin goes down, but in dollars they doesn’t have to go down if we can work more efficiently. So, that’s our plan there and I think there is a big transformation going on in our company in order to allow us to work even more efficiently. And actually it’s what the world is telling us all the software publishers that are adding that have the 10 bells and whistles have all the bells and whistles, nobody is looking for a Ferrari right now, everybody is looking for a Toyota. And right now we have to follow that market, so we really have to do what is being asked of us and do an excellent job at that. And that’s going to take some time, but meanwhile we have to win that ourselves as profitability continue stayed up. And I am extremely pleased that we were able to report these results.

So, in terms of using the cash on our balance sheet to repurchase that is something that we do. We are helped – bound by certain market rule or restrictions in terms of how many shares can we buyback on a daily basis when can we buy them back. And we are always looking for blocks of shares that people are willing to sell to us. So, if there is somebody willing to sell a block of shares to us, we’re definitely interested in that. In terms of paying out a one-time dividend, I don’t think it would add a lot to the attractiveness of our stock and most importantly we want to be big, so we play big. We are a public company we want to use our cash to finance the growth of our company, finance new opportunities and we want to continue to have that flexibility. So, that with regards to using our cash to buyback shares, we are doing that, but I don’t seem it feasible or adding to any attractiveness of the stock price to pay one-time dividend. And I hope that answers your question.

Operator

Thank you. Our next question comes from (indiscernible).

Unidentified Analyst

Hello, Simon. I appreciate being on the call. I am a Private Investor also happen to be in private equity and I have a decent stake in the company. And I have kind of a two part question arguably, it’s really two questions, but it supposed to be one question. One thing for the question is just I would suggest certainly for the team to consider going private in this sort of scenario given that the stock is not particularly liquid and just given the public expenses. I would certainly recommend considering that.

In terms of my question, my question is if you look at the two divisions in the most recent quarter, TechXtend, obviously there is revenue softness, but the margin actually with a decent amount, better. And with respect to that segment, the question is really what do you expect to continue? And the Lifeboat side from where I said it looks like the margins are stabilized, they haven’t improved, but if you take a full year 2012 margin on that segment it’s 7.2, and in the most recent quarter, it’s 7.1, so it appears like it stabilized and if that was the case and you can continue here favorable sales trends, which have been going on for quite sometime. We would expect to get some kick – earnings kick out of that side of it going forward as the comps get a little easier from a margin perspective. So, anyway, those are the questions really the trends on TechXtend and Lifeboat, whether you think the margins is kind of, I guess, TechXtend, whether the higher margin was a bit in your favor, whether you think there maybe a trend there. And on the revenue side and then whether Lifeboat margins have stabilized and you think you can continue on your continually upward sales trend on that division.

Simon Nynens

Okay, perfect. First of all, thank you for your investment and for your time this morning. With regards to going private like I just commented we like to be a big company and we like to play as a big company. So, our goal is definitely to continue to win market share and to continue to grow our business. We are really passionate about that. That’s what it’s all about for us. If we are going private, if the share price really continues to be undervalued, if that is of an opportunity for us to grow our business, I would consider. Again, I am mostly concerned about growing our business and winning market share, but that is as a private company or as a public company that is of a secondary interest in it. I personally believe that being a public company does not cost us as much as people think it is. If you look at it, you also need Board of Directors with the size our company, you need a Board of Directors, we need proper infrastructure, we need a financial infrastructure, but there are some cost savings definitely in terms of being a private company versus a public company.

However, I don’t like to run the company for financial gains or losses or anything like that. I’d like to run the company to really grow and win from my competition and grow this company into offering services and creating value for our customers, and we are really all passionate about that. So, I hope it answers your question. If it is an opportunity and it’s just a great opportunity for us to take this company private, we believe in it, we will, but I also think that if we want to be a large company, we need to be public. On TechXtend margins, the main reason that they were higher than last quarter is because of those large deals. Those large deals want to over $0.5 million typically tend to represent less margin as a percentage. So, those large deals impact the overall gross margin percentage. Now, it’s definitely it’s our objective to grow the overall gross margin as a percentage as well, but what you see is that revenue is higher and more of those large deals come in that the overall gross margin percentages is lower, but the gross margin dollars increased. And with regards to Lifeboat, the margin being stabilized, that’s exactly what we see as well and we hope to continue to grow and add lines this year and indeed show that revenue growth. Dan?

Dan Jamieson

Yeah, I mean, just add to that along those lines and chiming to Simon’s comment earlier, regardless of what the competition is doing and we have to react to that. What we really try to do is view in our people that especially in this comment, it’s always important to decide who you want to work with. But right now and this climate is just as important probably even more important to decide who you don’t want to work with. So, what we have been doing in a real concentrated sense is really focusing on the partnerships and in relationships that can deliver the maximum ROI in a very tough environment and that continues, we are going to continue to do that, we are going to continue to go to our strengths, and we have the strong value proposition. We are very attractive in the niche that we are into the distributions here. And I think we are growing as a truly value-added distributor, a specialty distributor focused on software.

Unidentified Analyst

Thank you.

Simon Nynens

Thank you.

Operator

(Operator Instructions) I am showing no one in queue at this time. Please continue with any closing remarks.

Simon Nynens

Thank you for your interest in our company, and we look forward to reporting our second quarter results at the end of July of this year. Thank you.

Operator

This concludes today’s conference call. You may disconnect at this time. And thank you for your participation.

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