Melanie Caponigro - IR
Simon Nynens - Chairman, President and CEO
Dan Jamieson - VP and General Manager, Lifeboat Division
Shawn Giordano - VP, TechXtend Division
Matthew Paul - Sidoti & Company
Wayside Technology Group, Inc. (WSTG) Q4 2013 Earnings Conference Call February 7, 2014 10:00 AM ET
Good morning ladies and gentlemen and welcome to Wayside Technology Group Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. 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.
Thank you and good morning. Welcome to Wayside Technology’s Fourth 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 call. We released earnings for the fourth quarter at approximately 5 PM Eastern Time, Thursday, February 6, 2014. 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 a rebroadcast will be available at www.waysidetechnology.com/earnings-call. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, February 7, 2014. A detailed discussion of risks and uncertainties are discussed in our Form 10-Q and also in greater detail in our Form 10-K. Wayside Technology Group Inc. sees no obligation to update and does not intend to update any forward-looking statements.
Now, I would like to turn the call over to Simon Nynens.
Thank you, Melanie and good morning to everybody. We are very pleased to report such a strong finish to 2013 with the fourth quarter being our best quarter of the year. Q4 2013 income from operations increased by 25% as compared to Q4 of 2012 and we achieved record net income of $6.4 million for 2013. Cash marketable securities and long-term receivables and that’s basically part of the FPO deals we do with our customers. So, its money we basically borrow to our customers amounted to $29.6 million, representing 85% of equity as of the end of the year and $6.25 per share.
We provide easy access to the right IT products. In addition to our electronic license delivery systems, our outstanding customer service levels and our dedicated staff, truly sets us apart. As we continue to explore, define and build our competitive advantages, we continue to invest in our company. We are pleased to announce that our electronic inventory systems can now handle near instantaneous delivery. Now, I would like to hand it over to Dan Jamieson, our Vice President and General Manager of our Lifeboat Division. Dan.
Thanks Simon. Lifeboat’s Q4 2013 results reflect positive year-over-year growth across all cylinders of our business. The key factors in Lifeboat’s Q4 positive performance were the successful penetration and expansion of pivotal software lines within a variety of Lifeboat’s premier reseller accounts, the large account resellers and DMRs, the direct market resellers. Along with the successful expansion of business within targeted solution provider accounts including VARs, the value added reseller, SIs, the systems integrators and other consultancy tech companies. Lifeboat holds two annual partner events during the year. In October of Q4 Lifeboat held its Annual Eastern Cross Channel Connection Partners Summit in Atlantic City New Jersey. The event was a tremendous success with over 30 vendor partners, sponsors participating and over a 160 reseller partners attending from Lifeboat’s worldwide reseller community including partners from United States, Canada, Brazil, Argentina, England, Poland, India and China.
Lifeboat’s Western Cross Channel Connection Partners Summit 2014 will take place in Las Vegas, Nevada during this upcoming May 5th and 6th and will be followed later in the year by Lifeboat’s Eastern Cross Channel Connection Partners Summit 2014 in October at Atlantic City New Jersey. Lifeboat signed three new distribution agreements in Q4, 2013. These new agreements will strengthen Lifeboat’s portfolio and enhance our focus on our go-to-market concentration areas including virtualization, security, application lifecycle management, database infrastructure, application and network infrastructure and business productivity. Thank you, Simon.
Thank you, Dan. I would like to hand it over to Shawn Giordano, our Vice President of our TechXtend division. Shawn.
Thank you, Simon. As compared to an exceptionally strong fourth quarter in 2012 our team performed well. We saw an increase in our larger FPO transaction, deals to find over $50,000. Additionally, we saw an increase in our solutions focus business in the areas of virtualization and cloud storage and infrastructure management and business intelligence and information management.
While we saw a 10% decline in revenue, our gross margin decline was only 2% quarter-over-quarter. The increase in gross margin as a percentage of sales was attributed to the larger transactions as well as our more profitable solutions focused business inclusive of software, hardware and services. We continue to build strong relationships with our clients, acting as a trusted advisor and providing them with easy access to the right IT solutions. I’d like to commend the sales team for a job well done in the fourth quarter. Additionally, I would like to thank our marketing and back-office teams as well, without them our results would not be possible.
Thank you, Shawn. Tom Flaherty will now report in the financial numbers
Thank you, Simon. I will discuss our fourth quarter financial results, both on a consolidated basis as well as by business segment. Net sales for the fourth quarter of 2013 were $89.9 million. This is compared to $85.5 million in Q4 last year, representing a 5% increase on a consolidated basis. Sales for our Lifeboat distribution segment were $65.7 million and represent 73% of our total revenue during Q4. Lifeboat sales reflect a 12% increase compared to Q4 last year. The increase in sales in the Lifeboat segment was mainly a result of the strengthening of our account penetration, continued focus on the expanding virtual infrastructure centric business and the addition of several key product lines.
Sales for our TechXtend segment were $24.2 million compared to $26.9 million in Q4 last year, representing a 10% decrease. The decrease in sales in the TechXtend segment was primarily due to a decrease in relatively large single sales transactions among our hardware sales compared to the prior quarter, offset by a 2% increase in our extended payment term sales transactions in Q4 as compared to Q4 last year.
On a consolidated basis, our gross profit was $7.8 million compared to $7 million for the fourth quarter of 2012, representing an 11% increase. Our gross profit for the fourth quarter of 2013, I’m sorry, our gross profit margin for the fourth quarter of 2013 was 8.7% compared to 8.2% in Q4 last year. Lifeboat distribution’s gross profit for the fourth quarter was $5.3 million. This compared to $4.5 million in Q4 last year, representing a 19% increase. This increase was primarily due to higher sales volume in the current year. Our TechXtend segment’s gross profit was $2.5 million and decreased by 2% as compared to last year. The decrease in gross profit was primarily due to decreased hardware sales offset by higher gross profit on software sales despite the decrease in the sales. And the increase in extended payment term sales transactions in Q4.
Vendor rebates and discounts for the quarter ended December 31st amounted to $700,000 or 0.8% of net sales as compared to $400,000 or 0.4% of net sales for the fourth quarter of 2012. The company monitors gross profits and gross profit margins carefully. Price competition in our market persisted in the fourth quarter of 2013. We anticipated that margins as well as discounts and rebates will continue to be effected by this current trend.
Total selling, general and administrative expenses were $4.3 million compared to $4.2 million in Q4 last year. This increase primarily the result of an increase in commissions for our Lifeboat segment, which are based on gross profit and segment income offset by decrease in TechXtend segment commissions.
Our net income for the fourth quarter of 2013 was $2.5 million compared to $1.8 million in the prior year. Q4’s income tax rate was lower primarily due to a change in the State of New Jersey’s apportionment rules, which lowered our state tax rate as compared with the prior year. Earnings per share on a fully diluted basis was $0.55 per share compared to $0.39 per share in Q4 last year.
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 $19.6 million at December 31, 2013 and this is compared to $14.2 million at December 31, 2012. This increase is comprised primarily a $10.3 million of net cash flow from operations offset by dividend payments of $3 million and $2.1 million of purchases of our treasury stock. Accounts receivables current and long term decreased by 3%, this is primarily due to a lower level of extended payment terms sales transactions in 2013 as compared to 2012.
Accounts payable and accrued expenses increased by 2% due to an increase in purchases to support higher sales volume in Q4 2013 as compared to Q4 2012. The company has no other debt. We do however have a $10 million revolving credit facility that can be used for working capital purposes, including financing of larger extended payment term sales transactions.
As of the end of 2013, we have no outstanding balances under the credit facility. Working capital at December 31, 2013 was $24 million. During the quarter, we continued to repurchase approximately 21,000 shares of our common stock under our 10b5-1 stock purchase plan. We still have authorization to buyback approximately 190,000 shares under the plan. Our stockholder equity now stands at $34.7 million.
At our February 5, 2014 board meeting, the Board of Directors declared a $0.17 dividend per share for its common stock payable February 28 to shareholders of record on February 18. The company has now paid dividends consecutively for over the last 44 quarters.
In conclusion, the company continues to have solid operating results, a strong balance sheet and is adequately capitalized to support our continued growth plans. I want to personally thank all of our team members worldwide.
Simon, back to you.
Thank you, Tom. Now, before we start the Q&A session, I would like to mention as well that we’re very pleased to have Steve DeWindt joined our Board. Steve has a wealth of experience and we’re really excited to have him join our Board. And he’s going to work closely with the management team in terms of exploring new growth strategies and we look forward to 2013 with the great expectations. We remain focused on adding new publishers, inviting our customers with excellent customers service and providing our employees with a great and rewarding working environment.
With that said, I’d like to open it up for the questions.
(Operator Instructions) Our first questions comes from the line of Mathew Paul. Your line is open.
Matthew Paul - Sidoti & Company
Hi guys. Good morning. Thanks for taking my questions. I'm filling in for Brian Hollenden this morning from Sidoti & Company. Just a couple of financial question first with the change in the New Jersey state tax level. Could you address the rate to expect moving forward and maybe for 2014?
Sure. Going forward our tax rate will be approximately 35%.
Matthew Paul - Sidoti & Company
Okay. Thank you. Moving forward what the competitive pressure you’ve noted on the call saturating a gross margin could you also address or provide a little bit of color on movement in gross margin you expect for the year.
So, we cannot give forward looking information other than what we see is this pressure and as we continue to see that pressure environment, the overall economy -- I think overall the outlook is going to be good 2014. In our distribution segment of the economy, there is a lot of stuff going on especially in the hardware sector. And people are getting as we saw a couple of years ago and I think it hasn’t really changed from the last couple of years. And I think we see that environment remain about the same but it seems to be intensified pricing pressure. We just see some -- we just got to be careful there, we are always conservative as in previous years to state that we do see some margin pressures creeping up again. We fought that successively over the last couple of years and the way out of that for us quite honesty is to grow our revenue and to build a very effective and efficient machine here, it’s exactly what we’re doing and why I think we’ve been so successful over the last couple of years is with that effective and efficient machine to be able to handle business at the lower margins while still continuing these great results if you look at return on equity of our company, if you look at the conservative way we are financed, we’ve been doing very well and we expect to continue doing so.
Matthew Paul - Sidoti & Company
Okay. Thank you. Moving forward, I want to ask a growth forecast for the TechXtend segment in 2014, I was wondering, maybe low single digits with same reasonable tier?
Yes again we cannot give forward looking information because again there are no long term contracts in our business. Every day, it starts all over again. We go out there with great passion and we book what we can and we build relationships, but there are no long term contracts in our industry and we fight that battle day-to-day. Having that said like I said we overall would see the economy improving and we look forward to a strong 2014. How strong that’s going to be? I have no idea right now. It’s too early to tell that.
Thank you. Our next question or comment comes from the line of Chris Parker. Your line is open.
Thank you very much and thanks Simon and everyone else for another great quarter and the great year, we really appreciate the performance and the work every day. Also, thanks for the dividend increase. That was noted and very much appreciated. And as far as the financial reporting, in an era where we’re getting more and more or take financial statements a lot of times from companies, it’s really nice to have transparent reports like the liquidity report you issued last night. You mentioned specifically that affected the earnings favorably and really appreciate all the detail and the financial statements. My question is, it looks to me like when we include the cash and marketable securities that balance is up about $5 million over what it was a year ago, and assuming that that continues to build that sort of a rate that’s currently about $4 a share in cash. Do you have any long-term plans, any long-term thoughts about I don’t know a further increase in the dividend, a tender offer for some stock what you do with that large cash pile?
Right. Also first of all what we do with the cash during the year is some of that increase in cash is due to our normal payment cycles, so you just have to take into account accounts payable. And then what we do with that cash as we use it generally to keep our vendors very happy and repay people on time. And we try to collect as close as we can through the due date of our customers. Part of that expanse of reason why we’re producing those as you say very large cash flow balances, positive cash flow balances in last couple of years, is if you look at our income statement we were in a time shipyards. We really try to build an efficient and effective machine. Part of that as that is there is a paper, so called paper expense that changed here as it go in terms of accounting for restricted stock plans that shows up in our income statement.
And by the way to your point we really try it’s not a difficult decision business and we try to give as much information as we can. We tend to give as much information break it out as much as possible for our investors because there is nothing to hide and we don’t like grades. We like white and black and we try to be as open as we can with investors and I really appreciate your comment earlier. And if you look at that you see that stock based compensation is spread out separately. Now if you look forward as you’ve seen in last couple of years, should we continue to do well we have protected the dividend that’s really important to us we are shareholders too. We have the largest shareholders sitting on our Board. So we’ve tried to protect our dividend and we try to grow with and we have done so over the last 10 years we started at $0.10 and like you said we just increased it to $0.17 and see that continuing going forward.
In addition, but I’ve said this for years. We continue to look at acquisitions but it’s got to be the right play. And we look at so. And I think you look at the European market years ago we thought about moving into the Asian market, it’s very difficult and what we found there is a strategy to grow there. We don’t want to get burned with a couple of million dollars and unless the larger companies we can buy 10 companies and expect all maybe to eight will fall off and two will do exceptionally well for us. We’re not an investment company. If we buy something, it has to go right. And it has to be the right acquisition for us.
And again I want to do that out of a position of strength, not out of a position as okay we have something to save here so let’s start and build something with an acquisition that we have to do in order to please the investors. The results are good. We’re grown. We’d like to continue to grow faster. We’ve slowed those options. And we could choose the cash for that. Having that said, I think the most viable option for us right now is to hang on to that dividend and try to increase it as much as we can. And we want our stockholders.
Thank you. At this time, there are no further questions. Please continue with any closing remarks.
We thank the interest in our company and we look forward to reporting our first quarter earnings in April of this year. Thank you.
Ladies and gentlemen, this concludes today’s conference call. You may disconnect at this time and thank you for your participation.
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