Good morning everyone. Thank you for participating in today's conference call to discuss Wayside Technology Group's financial results for the second quarter ended June 30, 2021. Joining us today are Wayside CEO, Mr. Dale Foster, the company's CFO, Mr. Drew Clark, the company's Investor Relations Advisor, Mr. Sean Mansouri with Elevate IR. By now, everyone should have access to the second quarter 2021 earnings press release, which was issued yesterday afternoon at approximately 4:15 P.M. Eastern Time. The release is available in the Investor Relations section of Wayside Technology Group's website at waysidetechnology.com. This call will also be available for webcast replay on the company's website. Following management remarks, we'll open the call for your questions. I'd now like to turn the call over to Mr. Mansouri for introductory comments.
Thank you. Before I introduce Dale, 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.
Our presentation also includes certain non-GAAP financial measures, including adjusted gross billings and adjusted EBITDA, 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 8-K we furnished to the SEC yesterday. With that, I'll turn the call over to Wayside CEO, Dale Foster.
Thank you, Sean Mansouri, and good morning everyone. Our strong second quarter results reflect a continued focus and execution of both organic and inorganic growth initiatives. We generated exceptional growth across all key operating and financial metrics during the quarter, along with our two acquisitions from the past year that are driving meaningful improvement in the respective geographies and vendor lines. As we have stated before, we have three core initiatives that drive everything we do. Number one, generate organic growth from existing vendors and customers. Number two, enhance our line card with addition of new emerging vendors. Number three, execute on our acquisition strategy by utilizing our balance sheet and free cash flow to acquire companies that will be strategic and accretive to our earnings. Within the existing vendor network, we continue to deepen relationships with a sales and marketing focus on higher growth products.
Our partners continue to recognize our unique ability to actively sell and market their products to channel customers. Spending on security and data center and cloud product lines remain all-time highs, and we plan to continue capitalizing on this market momentum by serving as an effective sales channel for our partners. The depth of our relationships is further reflected by the activity within our top customers and partners. For instance, in 2020, we generated $102 million of gross sales with our top 20 vendors. Today, we generate more than $156 million of annualized gross sales with our top 20, a 50% increase. This truly speaks to the quality of our service offerings and the value we provide to our customers and partners.
Although we are pleased with our performance to drive growth within our existing network of vendors and customers, we know there is always room for improvement, and we will continue to seek opportunities to deepen these relationships. Signing up new vendors is also key to ensuring that we have the most compelling list of technologies to offer on our line card. In Q2, we continued to execute on that front, as reflected by several new partnerships announcements in marquee companies like StorONE and D2iQ. To put some numbers behind the improvements we have made, in 2020, we generated $1 million+ in net sales with about 30 different customers. Today, we generate over $1 million of sales with more than 42 customers.
This is a reflection of both depth and breadth within our customer network and speaks to the proactive sales culture we have implemented across our various business units at Wayside. On the acquisition front, we continue to actively seek strategic opportunities across multiple geographies while working to drive efficiency through scale and various operating levers in all divisions of the company. During the quarter, we rebranded CDF Sigma Software Distribution business to Climb Channel Solutions, which brings together two highly respected channel brands servicing the emerging technology market. Sigma and Climb share many vendor relationships, which has made for a seamless integration process with a shared focus on driving growth and efficiencies. As you may have seen, earlier this week, we launched Climb Expedition, our new cloud marketplace designed for MSPs and hybrid VARs to explore and transact with vendors that are moving to a subscription-based model of software delivery.
Expedition is a flexible self-service platform that enables our partners to interact more efficiently with Climb's suite of technology solutions. Expedition not only benefits our customers, but also benefits our emerging vendors by extending their reach into the MSP community. I look forward to providing future updates on Expedition and how the new marketplace will help us distinguish us from our competition. Speaking of the competition, the continued consolidation in our industry provides us with an even greater opportunity to separate Wayside from the pack. In the past year, several of our top players in tech distribution either merged or have been acquired, including Ingram Micro's $7 billion acquisition by Platinum Equity, as well as Synnex's merger with Tech Data, which will create a combined company that will generate $57 billion in pro forma annual sales.
Companies like these don't offer the boots on the ground, high-tech support that we offer through our distribution and solutions. Emerging technology companies need more than simply supply chain logistics, which is the focus of most large distribution companies. For this reason, Wayside is well-positioned to win and differentiate itself in this segment of the market. Before I turn the call over, I want to discuss a few key new additions to the Wayside team. First, we are thrilled to deepen our bench on the board with the addition of Gerri Gold as a director. Jeri brings nearly three decades of executive experience to the board and is currently the Senior Vice President and COO of HP Financial Services, the IT asset management and financing division of Hewlett Packard, where she oversees $13 billion in assets across more than 50 countries worldwide.
We also retained a new investor relations firm, Elevate IR, to help improve our communications and awareness within the investment community. Given our improved financial profile and the strong momentum in our business, we felt the time was right to bolster our IR efforts, we look forward to working with Elevate to engage a broader audience going forward. Finally, in June, we appointed Drew Clark as our new CFO. Drew brings an outstanding track record of driving results for both public and private companies. He most recently served as the CFO of Medisolv and has served on multiple public company boards, including SafeNet and Howard Bancorp. Most importantly, Drew shares our vision of creating a differentiated platform of distribution and solutions for emerging technology brands, and he has a keen understanding of the critical work and infrastructure required to take Wayside to the next level.
Without further ado, I'd like to introduce everyone to Drew Clark as he takes you through our financial results. Drew?
Dale, thank you for the warm introduction, and I'm absolutely thrilled to be joining the team at such a pivotal time in the company's history. Let's jump right into our results. I'd like to note that all comparisons and variance commentary refer to the year-ago quarter unless otherwise specified. Net sales in the second quarter of 2021 increased 33% to $75.4 million compared to $56.6 million in the prior period. This reflects both strong organic growth and the benefit from the acquisition of CDF, as well as one month of incremental contribution from InterWork, which was acquired in May 2020. Excluding these acquisitions, we increased net sales by $9.8 million or 17% year-over-year, with CDF and InterWork contributing an estimated $6.9 million and $2 million respectively. Adjusted gross billings, a non-GAAP measure, increased 48% to $235.1 million compared to $158.7 million in the prior quarter.
Again, we experienced strong organic growth of 28%, or $45.2 million, with an estimated contribution of $20.9 million from CDF and $10.3 million from InterWork, which reinforces Dale's earlier comments regarding our continued execution of both organic and inorganic growth strategies. Gross profit in the second quarter of 2021 increased to a record 54%, or $11 million compared to $7.1 million in the prior period. Again, the increase was driven by organic growth and the benefit of the CDF and InterWork acquisitions. SG&A expenses in the second quarter were $8.5 million compared to $6.4 million, with the increase primarily related to incremental costs from the operations of CDF and InterWork, as well as costs related to investments in our business that we expect will drive continued growth in the quarters and years ahead.
These expenses include $2 million from CDF operations and $300,000 related to increased amortization expense, primarily attributable to our acquisition of CDF in November of 2020. $200,000 employee separation expenses were also part of this increase, and core selling expenses associated with the organic growth delivered through the gross profit increases, all of which were offset by last year's non-recurring approximately $500,000 of various expenses with the defense of the unsolicited bid and $200,000 of acquisition-related costs. As a percentage of net sales, SG&A was 11.3% compared to 11.2%. Net income in the second quarter of 2021 increased approximately four times to $2.1 million, or $0.49 per diluted share, compared to $600,000 or $0.13 per diluted share. Adjusted EBITDA in the second quarter increased 68% to $3.5 million compared to $2.1 million.
The increase was driven by the aforementioned organic growth and acquisition benefits, as well as a strong operating leverage. Effective margin, defined as adjusted EBITDA as a percentage of gross profit, increased 270 basis points to 32% in the second quarter of 2021 compared to 29.3% in the prior quarter. Cash and cash equivalents were $23.8 million as of June 30th, 2021, compared to $29.3 million as of December 31st, 2020. The expected decrease was primarily driven by timing of cash flows and is not an indication of any business or operating trends. The company remains debt-free with no borrowings outstanding under either our $20 million U.S. or GBP 8 million U.K. credit facilities, both with Citibank.
On August 3rd, our board of directors declared a quarterly dividend of $0.17 per share of common stock, payable on August 20th to shareholders of record on August 16th, 2021. Looking towards the balance of 2021, our strong liquidity position and our operating cash flow continues to provide us with the flexibility to execute on both our organic and acquisition growth strategies. Despite the strong results of our second quarter, we as a company still have work to do to achieve our desired levels of growth and profitability. As we look at the balance of 2021, we see ample growth opportunities to capture and look forward to achieving both our short-term and long-term goals, while continuing to build meaningful long-term relationships with our customers and vendor network. This concludes our prepared remarks, so we'll now open it up for questions.
Thank you. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touch-tone phone. We have a question from Ed Woo. Please go ahead.
Yeah, congratulations on the quarter. My question is, what are you hearing from your enterprise customers? Do they feel that the business environment is positive, or are they concerned about possibly upticks on COVID again, or people in terms of running out of steam, in terms of working from home and stuff?
Thanks, Ed. I think we talked about a little bit in the Q2 when we were going into it. It's just the optimism that you feel in the marketplace from our customers, both enterprise and the wide group of resellers that we support. We definitely see it from our vendors. I think we talked about it before that we were heading back to the office. Our teams are back in on July 6th, so that's all positive. I think there's optimism out there. We definitely see the pipelines filling up, which I think they've been dragging in the past. We're seeing it in the actual results side of things, so that's a good thing.
My next question is in terms of M&A opportunities. Are there a lot of opportunities out there, and what are you seeing in terms of valuations and in terms of capacity for M&A? Do you guys feel that you guys are ready to take on another acquisition at this time?
Yeah, let me start with the balance sheet part of it first. We're definitely positioned financially to do that, depending on what the target looks like. We definitely can go higher upstream, as you can see, that we could put some leverage on the business. As far as targets go, it's been consolidated in the U.S. You and I've talked about that in the past. There's not very many targets there. Western Europe is our focus. I can tell you that we have quite a few on the list. We've engaged with a select group of that, and it's always going to be part of our strategy in the near future to kind of do what we did with Interwork and CDF. It was good fits for us.
We'll take our time to make sure that we make the right moves, that it's a right strategic acquisition for the company of where we're going to go. It's not going to be way outside of our lanes. It's going to be in that distribution, MSP services type solution. You'll see that in the upcoming quarters when we talk about it.
Great. Well, thank you, and I wish you guys good luck.
Thanks, Ed, appreciate it.
As a reminder, if you have a question, press star then one on your touch-tone phone. Our next question comes from Howard Rue. Please go ahead.
Good morning, and congratulations, Dale and Drew, on a great quarter. It's just wonderful results to see. I have two questions. One is the cloud. Dale, when you started in 2018, that was one of the glaring holes. You had no cloud distribution, and you started working on it. I know you each had a project, and then you acquired CDF, which had the cloud platform, and I think that's what you've used. If you could talk about, is that project done? Are you satisfied with it? Is there more work to do? What has that meant to your revenue growth?
Yeah, the project will never be done when it comes to the cloud piece of it because you'll see all the two different providers, whether it's a hybrid cloud or how they actually want to transact. You're correct. We talked about it for a long time. We finally launched it with Climb Expedition. The underlying coding is the same one that CDF used, and we actually were going in that direction even before we acquired them. It was just a little more acceleration on our side. If you look at it, we don't track it separately now because it's so new as far as the dollars go. Here's the issue, and that is vendors are moving in that direction, and they're not moving as fast as Microsoft and where Microsoft is as far as doing subscriptions on a monthly basis. They're going to get there.
It might take them 18 months to get there. As they move in that direction, you'll see our licenses and our sales go from perpetual to subscription-based. It'll really kind of be a shift of our revenues, but we plan on capturing outside of that, just new additional territories that we can go into that we couldn't go into before when those many companies are just born in the cloud. It opens us up for just more vendors to look at that are just cloud vendors that we couldn't transact with. We're really new to it that way, and so is the rest of the market to be able to transact that way. You'll see us talk about that a lot Q3, Q4, and then probably next year will be the one we start actually looking and talking about the numbers on it.
Great. Well, that kind of segues into my second question, which is really looking at future growth. I think I finally, after following you for a couple of years here, finally figured out, I'm really paying attention to adjusted gross billings, which really is all of your product movement, whether it's net sales or not. If I look at that up 48% year-over-year and up 12% sequentially, you're closing in on $1 billion in adjusted gross billings. Then I take a look from that, I look at what gross profit you do from that, and I'm looking at around 5% of that adjusted gross billings is dropping to your gross profit line. If you could talk a little bit about looking forward. That kind of growth rate just isn't sustainable in very many places when you're already at that size.
What do you see as the potential? I don't want you to pin me into 48% year-over-year growth for the next five years, but what are you seeing? Are you at the beginning, middle, later stages of that kind of growth? What's the potential market for the overall business?
Yeah, I guess if I look in the macro level, and I talked about it in the release as far as look at the smallest of the large competitors, you have ScanSource in the billions of dollar range, and Arrow is $30 billion. That consolidation has already happened. There's a lot of headroom for us that we can go, and we tell investors, we can double in size and not be effective to the market, really. We'll make it disruptive, and like we are now, we're being very disruptive to some of our competitors in certain aspects of their divisions, right? Whether it's Ingram or Arrow or Synnex, Tech Data combination. I'm not saying we can grow at that rate, but there's so many targets. When I say targets, there's so many vendors.
We are approaching 500 vendors that we've looked at in the last three years, and we've only signed 50. That's over 100 a year. We're nonstop. We have a full recruit team. It's really about those vendors coming in. If we look at our top 20 vendors, we didn't have a relationship with them 18 months ago. There's that many coming out of the woodwork that needs our products sold. The issue is it's not even hitting single that's getting to that single hitting where you're saying, "Okay, can they move the deal with $10 million-$20 million?" That company gets a 50. We have some in our portfolio that have already done that, and it's kind of simple business. That's what we're going to do.
We'll just focus on bringing in vendors, growing up with them, keeping them as long as possible, and servicing them the best way possible. Then jettison the ones that are either the margins going out of the product and you can say, "Wow, the margins are low already," but that's the business we're in. The only thing that bolts of those margins is more service piece that which the industry talks about all the time. You can see in some of the results that we are doing some of that with the CDF Group, and we'll bring some of that to the U.S.
Great. The gross profit side of that, talk about how you view gross profit as a percentage of adjusted gross billings. Is it a percentage number?
Yeah.
I mean, a dollar number?
You're right, Howard, as far as you should look at the adjusted gross billings because that's the money we're collecting every day. That's part of the GAAP piece of it, how we actually have to count it for the GAAP and the accounting side. You look at our gross profit growth, you need to track us by gross billings, gross profit. Yes, it's 5%. Our major competitors, they're doing stuff in the sub four range. We have to do that once in a while as far as when it gets competition. That's our goal. We'd love to add some stuff of creative to the business that will get us over that five and keep it going in that direction.
Judge us by the gross profit piece of it, how much do we spend out of the gross profit and how much can actually drop to the bottom line. Are we at that inflection point to scale? No. Do we feel like we're close to that? Yes. We can really put and show the leverage that the business has. It's really about our vendors. They launch, they take off, one goes public, next thing you know, we're riding that train. You'll see that inflection point where you see more drop through.
Great. Thanks, once again, wonderful question. Drew, welcome to the team, and a great quarter to start.
Thanks, Howard. I appreciate it. Thanks for the support.
Yeah. Thanks, Howard.
Our next question comes from Walter Ramsley . Please go ahead.
Oh, thank you. Congratulations. Super quarter. Question about the tax rate that was down a little in the quarter, can you give us an idea of what it should look like for the second half and maybe just for the full year?
Yeah, Walter, the effective tax rate is slightly lower than the historical trends, predominantly due to our CDF acquisition and some of the European tax rates when you factor in the various component parts thereof, has actually lowered our overall effective tax rate. We look to probably be at that 22.1%, 22.2% for the balance of the year and year-end overall.
Oh, okay. That sounds good. The SolarWinds company, they've had their problems. Has that spilled over into your business? Could you just talk about that a little?
Yeah, thanks, Walter. We talked a little bit on Q1 because it was really affecting us. We've doubled down with SolarWinds. They've been a great partner of ours. We've actually spent time with their team in Austin, as everybody's getting back to the office. Some recovery in Q2. We continue to see that going on. They've split off with one of their MSP divisions called N-able, and we've signed the contract with them, so we'll actually have a 2-fold approach from the legacy SolarWinds and going forward. Yeah, they're a good company. They're actually going to do some retooling of how they go to market with their tools and monitoring. I think we'll see some exciting stuff out of that come into Q4. Just like Sophos has been a good, we've had soft quarters with them, and it's been strong quarters.
Sophos announced their new firewalls, and that's been just a bolster or boosting to their sales for this quarter as well.
Okay. Sounds good. Well, thanks again. Great quarter.
Thanks, Walter.
We have no further questions at this time. I will turn it over to Dale Foster for final remarks.
Thanks, operator. Thanks to all the shareholders. Appreciate your support. Thanks for the questionnaires that you put in. We'll definitely reach out to the investor community and just keep updating on what we're doing. If you have any requests for meetings, hook up with Sean. Thanks to the board of directors. Our board's got a different look to it. Great meetings this week with our board. Thanks to the employees. Everybody's back and charging strong, so appreciate it. Thank you, everybody, again. Appreciate it.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.