Wayside Technology Group, Inc. (NASDAQ:WSTG)
Q1 2016 Earnings Conference Call
April 29, 2016 10:00 a.m. ET
Melanie Caponigro - Director, Accounting
Simon Nynens - Chairman, President and CEO
Bill Botti - EVP
Good morning ladies and gentlemen, and welcome to the 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 and instructions will follow at that time. [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 First Quarter 2016 Earnings Call. Before turning the call over to Simon Nynens, the company's Chairman and CEO, I'll dispense with the customary cautionary language and comment about the webcast for this earnings call. We released earnings for the first quarter at approximately 5:00 PM Eastern Time, Thursday, April 28, 2016. The earnings release is available at the Company's Investor Relations Web site 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, April 29, 2016. 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 statements.
Now, I would like to turn the call over to Simon Nynens.
Thank you, Melanie, and good morning to everybody. Considering the overall environment, we are pleased to report solid quarterly result as compared to an exceptionally strong Q1 2015. Our investments in Lifeboat distribution segment delivered solid results as they continue to execute on a strategic plan. Our TechXtend segment's revenues were down compared to an exceptionally strong Q1 last year, which benefited from a strong level of extended payment term sales transaction business.
We bought back a total of approximately 53,000 shares in the first quarter of 2016, and we still have approximately 415,000 shares of our common stock available for future repurchase. We will continue to buy back shares according to our 10-b5 Stock Repurchase Plan.
Cash and long-term receivables amounted to almost 40% of our market cap, at 31.1 million, and represented 81% of our equity as of the end of March 2016.
Now, I would like to hand it over to Bill Botti, our Executive Vice President. Bill?
Thank you, Simon. Net sales for the first quarter ended March 31, 2016, increased 1% or 0.6 million to 93.3 million, compared to 92.7 million for the same period in 2015. Total sales for the first quarter of 2016 for our Lifeboat distribution segment were 86.3 million compared to 82.9 million in the first quarter of 2015, representing an increase of 3.4 million or 4%. Total sales for the first quarter of 2016 for our TechXtend segment was 7 million compared to the 9.7 million in the first quarter of 2015, representing a decrease of 2.8 million or 28%.
The 4% increase in net sales for the Lifeboat distribution segment was mainly the result of the addition of several key product lines, and our ongoing strategy of strengthening of our penetration. This was offset in part by lower sales to one of our key accounts. The 28% decrease in net sales in the TechXtend segment is primarily due to 2.2 [ph] million decrease in extended payment term sales transactions and lower hardware sales of 0.4 million as compared to the first quarter, ended March 31, 2015.
Gross profit for the first quarter ended March 31, 2016, was 6 million, a decrease of 6%, as compared to 6.4 million in the first quarter of 2015. Gross profit for our Lifeboat segment in the first quarter of 2016 was slightly lower, at 5.1 million, compared to 5.2 million in the first quarter of 2015, representing a 2% decrease. This decrease in gross profit margin for the Lifeboat distribution segment was impacted by the product mix sold, as well as by a program change of one of our main vendors, causing gross margins to decline by 2.7% for that line.
Gross profit for our TechXtend segment in the first quarter of 2016 was 0.8 million compared to 1.1 million for the first quarter of 2015, representing a 29% decrease. This decrease for the TechXtend segment was primarily due to the decreased sales volume in our extended payment plan programs.
We continue to be excited about our future. We continue to add lines, and we continue to invest in our professional services. We feel strongly that this is the right direction. We are also excited about the expansion of our relationship with Micro Focus, and the addition of Novell, NetIQ, and SUSE to our portfolio. We continue to manage our expenses, and build our product portfolio to help achieve our growth targets.
Thank you. Simon, back to you.
Thank you, Bill. As Kevin Scull is out of the office due to a personal matter, Melanie will now report on the financial numbers. Melanie?
Thank you, Simon, and good morning to investors, analysts, and employees. I will discuss our first quarter financial results both on a consolidated basis as well as by business segment. Since Bill Botti already discussed sales and gross margins, I will start with the SG&A. Total SG&A expenses for the first quarter of 2016 were essentially flat, at 4.5 million compared to the prior year. SG&A expenses as a percentage of net sales were 4.8% in 2016, compared to 2.9% in 2015. Our net income for the first quarter of 2016 was 1 million, compared to 1.3 million in the prior year. Earnings per share on a fully diluted basis, was $0.22 per share, compared to $0.28 last year.
Moving on to the balance sheet, compared to our balance sheet at December 31, 2015, the following key accounts had fluctuations. Cash increased by 500,000, to 24.3 million at March 31, 2016, compared to 23.8 million at December 31, 2015. This increase is comprised primarily of net cash flow from operations of 2.3 million, offset in part by dividend payment of 0.8 million and 0.9 million of purchase of treasury stock. Accounts receivable and loan [ph] term decreased by 6%, and accounts payable decreased by 5% primarily due to lower sale volume in the current quarter compared to Q4 2015.
As of March 31, 2016, we have no outstanding balances under our credit facility. Working capital at March 31, 2016 was 31 million. During the quarter, we repurchased approximately 53,000 shares of our common stock under our 10-b5 Stock Repurchase Plan. We still have Board authorization to repurchase up to approximately 415,000 shares. Our stockholders equity now stands at 38.6 million. At our April 25, 2016 board meeting, the Board of Directors declared a $0.17 dividend per share for its common stock payable May 17, to shareholders of record on May 10, 2016. The company has now paid dividends consecutively for the past 53 quarters.
In conclusion, the company continues to have solid operating results, a strong balance sheet, and is adequately capitalized to support our continued growth plan.
Simon, I turn it back to you.
Thank you, Melanie. Before starting the Q&A session, I'd like to just state again that we remain focused on providing our customers with excellent customer service, providing our employees with a great and rewarding working environment. With a current dividend yield of about 4%, an over 31 million, more than a third of a market cap in cash and long-term receivables, we are confident in the performance of our stock price.
Thank you. Operator, we can now start the Q&A session.
Thank you. [Operator Instructions] Our first question comes from Sam Shaffer [ph]. Your line is now open.
Thank you very much for taking my question today. I'm just curious, I believe last call you were in the progress of moving your headquarters, and I'm just curious if you provide a little bit of color on how this transition is progressing?
Yes. So we made that announcement in Q3. They were looking at a new headquarters, and we tentatively have reached an agreement to buy our headquarters. Subsequently we discovered numerous issues with moving to that building, including a large property tax issue that we could potentially run into in the next five to 10 years. So we decided to rent, to go back to an office that we could rent. We found that office. We're moving to our new headquarters in the third quarter, probably the end of July, beginning of August, excited about that building. It's on the third floor, 20,000 square foot, and what we're going to do with activity-based working is to give everybody a great working environment, to make sure that we can fully utilize that building and it can house a lot more employees in that building considering our growth plans. So, everything is on track right now. They just ended the demolition, and they're ready to start building now, the inside of the building, and we look forward to go into our new office.
Great, thanks for that. And you mentioned the growth, and now that Bill has been settled in -- I'm curious if you could provide a little bit of color on the sales and revenue growth moving forward?
Yes, sure. So our first quarter, if you look at our competition Ingram Micro reported this morning, you know, significantly down, as well as a lot of people in the IT industry, and what we saw was actually good growth. There were two issues this quarter that we also mentioned in our press release that made headwinds for us. One was, we lost a very competitive bid to one of our key accounts, and that was about $4 million that we lost there in revenue. But despite that, we still grew 4% in the Lifeboat sales. And the second thing is that one of our main vendors lowered their overall channel margin through the distribution to all their distributors, and that impacted our margin by 2.7%.
So the main vendor in terms of the decline in lower channel rebate to all distributors, that's going to continue. But we are signing up tenders as we stated last quarter as well. We're gradually signing up new vendors. We expect growth from that in the remainder of 2016. And the bids are coming out ever six months for that vendor. So we do expect to go in aggressively again, and try to recapture the business. However, as we stated before, we are here to maximize our income from operations, our net income. And so we have to do what net-net is good business for us.
So with those two factors, I'm actually positive about the remainder of 2016. And again, we cannot give forward-looking information, but April was much better than January and February. And March started to stabilize, and April felt as much better. So that's what I could currently see what's out there. Bill, maybe you want to add some flavor to that as well?
Sure, Simon. In face of the headwinds that are going on in the industry, as Simon mentioned, a lot of IT people, both vendors and distribution and large resellers, they're all reporting softer spend. And in these kinds of times the larger companies get very aggressive. And henceforth we were aggressive in our bid. But we still lost that. And at the end of the day, those come and they go. As you capture new lines you capture new bids, it goes up and down. In light of that headwind in the change in margin by one of our key vendors, the fact that we were able to increase revenues speaks well to the uptick in the rest of the things that we're doing.
And as we add and gain momentum with these new lines that have higher margins, we can balance these things. Our goal is to either grow the product portfolio to either provide solutions, educations and services. These are things that take time to mature and develop as part of our strategy, but that's ultimately where we're headed. And in the light of these headwinds, we continue to grow effectively against our competitors.
Right, so we're watching our expenses, and considering these headwinds. But our mid-term to long-term business plan has not changed. And we're seeing a lot of positive signs from our customers with regards to the professional services. And in addition, we're rebranding the Lifeboat brand. We're redesigning our Web site, our e-commerce sits right now, as we speak. That will be released in Q2-Q3. So lots of good things are happening. Unfortunately business comes in waves, and we have to get through this to get to our -- back on plan. We see the early signs of that in April.
Great, thank you for the additional color. And just one more question if I may. You have, as you're well-aware, a very strong balance sheet. Your cash position continues to grow, as you've stated, let's say, very large percentage of your equity and market cap. And continue to buyback treasury stock as well. I was just curious if you could provide a little bit of color on the plans for that cash, and then the plans for all the treasury stock that's being held by the company?
Yes, so we personally think it's a very good investment in terms of the return on our equity. And considering the performance of our stock price, we think it's a very good investment of us to invest in our future and in our own stock. We also utilized that cash for these extended finance opportunities –- those extended payment term business transactions. And what that is, somebody buys software now and wants to pay us in three equal parts, and which is better for them cash-flow wise or budget-wise. And there's good margin opportunities in them. And so we continue to pursue those. And for that we need part of that cash.
In addition, we're looking at acquisitions, but I've said that a long time, we're actually actively looking to reengage again with investment advisors to see if there's currently opportunities out there. We owe that to all of you as shareholders, and to ourselves as shareholders to review that. So we're definitely -- that's definitely in the works to do that this year. To actively reengage, and see what opportunities are out there.
Is that in the Lifeboat or TechXtend segment, or both?
So we looked at that a couple of years ago. We said, it might be actually be good to buy a software publisher, and because they carry much higher margins. But that's a totally different business. After some good and hard thinking, what we are looking for is to expand in our Lifeboat distribution side of the business. And then especially in the services side, so the people who have consultants and service fee [indiscernible] community, those kind of companies would be good for us to look at, so primarily in the Lifeboat. I do not expect to make major acquisition on the TechXtend side.
Interesting. Well, thank you very much, and hope you guys have good luck moving forward.
Thank you. Have a good weekend.
And our next question comes from Jane [indiscernible]. Your line is now open.
Good morning. A couple of questions, first of all, I think that I'm quite, as a shareholder, I'm kind of disappointed in the quarter, but going forward, what specifically are you doing to have TechXtend rebound to its previous levels?
So considering TechXtend, a large portion of that business is -- and by the way, we are all as shareholders disappointed. I'd like to report 30% growth every single quarter. Unfortunately there are headwinds, and we're dependant on a lot of factors. And despite being close to $400 million a year, we're still a small player in the field. We actively look at profitable opportunities for us to pursue. Unfortunately January and February, there were simply none. And that comes with the business. Trust me, we have long meetings internally here to see how we can approach that. But I do think there are opportunities for us for the remainder of the year. Because despite some of our competition who right away start writing restructuring plans, we did let some people go, and we're watching our expenses carefully. But you should not shoot yourself in the foot while you're trying to make one quarter, and really jeopardize the future of your company. There are a lot of things that still have to pan out. We made investments, strategic investments. And we're still paying money for [indiscernible] the professional services. We're losing money on that. The opportunities are out there. There are large opportunities out there, and we will continue to monitor that.
I think overall, as a return on equity, we're still doing pretty good, still a highly profitable company. And in terms of the TechXtend business, how do we plan to turn that around. A, is by really aggressively looking for really good sales people. And I got to tell you, at TechXtend in Canada, we expanded our team there. And the expansion of the team made an immediate impact on our business. And I think that's the way forward. We need good sales reps. We see better environment for the extended payment terms business in Q2, and we'll continue to monitor that.
Okay. And my other question regards the company is purchasing stock. But other than exercising and sale of options, I haven't seen any of the people, officers and directors purchasing stock. If the company feels that it's a good value at these prices, why haven't we seen some of the insiders purchasing stock?
I'm the second-largest shareholder. I have an enormous portion of my personal wealth invested in this company. And I cannot speak for the other directors. I know they have –- they made investments. They did buy shares. I don't personally want to [indiscernible] them to buy. Everybody makes their own investment decisions. I think those are different things. But I agree with you. It's a good opportunity, and that is exactly why we're buying back and utilizing our cash as a company to buy back our own stock.
All right, well, thank you for taking my questions and good luck in the future.
Thank you so much.
Thank you. At this time there are no further questions. Please continue with any closing remarks.
We thank you for your interest in our company, and we look forward to reporting our results in July to report our progress for the second quarter. Thank you so much.
This concludes today's conference call. You may all disconnect at this time. Thank you for your participation.
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