Good morning, everyone, and thank you for participating in today's conference call to discuss Wayside Technology Group's Financial Results for the Q2 ended June 30, 2021. Joining us today are Wayside's CEO, Mr. Dale Foster the company's CFO, Mr. Drew Clark and the company's Investor Relations Advisor, Mr. Sean Manjuri with Elevate IR.
By now, everyone should have access to the Q2 2021 earnings press release, which was issued yesterday afternoon at approximately 4:15 p. M. Eastern Time. The release is available on 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 segments 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 SEC. Do not place undue reliance on any forward looking statements, segments, 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, segments, 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 factors in accordance with SEC rules. You'll find reconciliation charts and other important information in the earnings press release and Form 8 ks we furnished to the SEC yesterday. With that, I'll turn the call over to Wayside's CEO, Dale Foster.
Thank you, Sean, and good morning, everyone. Our strong second quarter results We generated exceptional growth across all second half of twenty nineteen. We have a number of key operating and financial metrics during the quarter along with our 2 acquisitions from the past year that are driving meaningful improvements in the respective
second half of twenty nineteen.
As we've stated before, we have 3 core initiatives that drive everything we do. Number 1, generate organic growth from existing vendors and customers number 2, enhance our line card with addition of new emerging vendors and number 3, Within the existing vendor network, we continue to deepen relationships with the 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 Our 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. For instance, in 2020, we generated $102,000,000 of gross sales with our top 20 vendors.
Today, we generate 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 and marquee companies like StoreOne SEC. To put some numbers behind the improvements we have made, in 2020, we generated $1,000,000 plus in net sales with about second
half of
twenty nineteen. Today, we generate over $1,000,000 of sales with more than 42 customers. This is session of both depth and breadth within our customer network and speak 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 second half of twenty nineteen. During the quarter, we rebranded CDF's Sigma distribution business to Climb Channel Solutions, which brings together 2 highly respected channel brands servicing the emerging technology market.
Sigma and Klim 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 Climate Expedition, our new cloud marketplace designed for MSPs and hybrid VARs to explore and transact with vendors segments that are moving to a subscription based model of software delivery. Expedition is a flexible self-service platform that enables our partners to interact segment. We also have a number of new customers segments. I look forward to providing future updates on Expeditions these segments and how the new marketplace will help distinguish us from our competition.
Speaking of the competition, The continued consolidation in the 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 $7,000,000,000 second half of twenty nineteen. We will now begin our acquisition by Platinum Equity as well as SYNNEX merger with Tech Data, which will create a combined company that will generate $57,000,000,000 second half of twenty nineteen. 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 addition of Jerry Gold as a Director, Jerry brings nearly 3 decades of executive experience to the Board and is Currently the Senior Vice President and COO of HP Financial Services, the IIT Asset Management and Financing division of Hewlett Packard, SEC, where she oversees $13,000,000,000 in assets across more than 50 countries worldwide. We also retained a new Investor Relations segment. We will now begin the Q1 of 2019.
Given our improved financial second half of twenty nineteen, we felt the time was right to bolster our IR efforts and we look forward to working with Elevate to engage second half of twenty nineteen. And finally, in June, we appointed Drew Clark as our new CFO. Drew brings an outstanding track record of driving results segment. He most recently served as the COO of Metasol 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 execution 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.
So 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. So 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 Q2 of 2021 increased 33 percent to $75,400,000 compared to $56,600,000 in the prior period. This reflects both strong organic growth and the benefit from the acquisition of CDF as well as 1 month of incremental contribution from InterWork, segment, which was acquired in May 2020.
Excluding these acquisitions, we increased net sales by $9,800,000 or 17% year over year, segment with CDF and InterWork contributing an estimated $6,900,000 $2,000,000 respectively. Adjusted gross billings, a non GAAP measure, segment, we increased 48% to $235,100,000 compared to $158,700,000 in the prior quarter. Again, we experienced strong organic growth of 20 percent or $45,200,000 with an estimated contribution of $20,900,000 from CVS and SECURITIES, we have reached $10,300,000 from InterWork, which reinforces Dale's earlier comments regarding our continued execution of both organic and inorganic growth strategies. Gross profit in the Q2 of 2021 increased to a record 54% or $11,000,000 compared to $7,100,000 in the prior period. Again, the increase was driven by organic growth and the benefit of the CDF and InterWork acquisitions.
SG and A expenses in the Q2 were $8,500,000 compared to $6,400,000 with the increase primarily related to incremental cost 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 $2,000,000 from CDF operations and $300,000 related to increased amortization expense, segment, primarily attributable to our acquisition of CDF in November of 2020. 200,000 employee separation expenses were also part of this increase segment. We are pleased with the
progress we made in the quarter with 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 and A was 11.3% compared to 11.2%. Net income in the Q2 of 2021 increased approximately 4x to $2,100,000 or $0.49 per diluted share compared to segment. Adjusted EBITDA in the 2nd quarter increased 68% to segment of the segment of the segment of the segment of the segment of the segment was $3,500,000 compared to $2,100,000 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 2 70 basis points to 32% in the Q2 of 2021 segment compared to $29,300,000 as of December 31, 2020.
The expected decrease was primarily driven by timing of cash flows and is not an indication of any business The company remains debt free with no borrowings outstanding under either our US20 $1,000,000 second half of twenty nineteen. On August 3, our Board of Directors declared a quarterly dividend of $0.17 segment. Thank you, Steve. Thank you, Steve. Thank you, Steve.
Thank you, Steve. Thank you, Steve. Good morning, everyone. 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 second quarter and acquisition growth strategies. Despite the strong results of our Q2, 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 second half of twenty nineteen. This concludes our prepared remarks. So we'll now open it up for questions.
And we have a question from Ed Woo. Please go ahead.
Yes,
congratulations on the quarter. My question is, what are you hearing from your enterprise customers? Do they Do you feel that the business environment is positive? It's or are they concerned about possibly uptick on the second half
of twenty nineteen. And I think it's the and I think we talked About a little bit into Q2, when we're 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 6. So that's all positive. But, yes, I think there's optimism out there.
We definitely see the pipeline filling up, segments, which I think they've been dragging in the past, but we're seeing it in the actual results side of things, so that's a good thing.
Great. And my next question is in terms of M and 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 and A, do you guys feel that you guys are ready to take on another acquisition At this time?
Yes, let me start with the balance sheet part of it first. I mean, we're definitely in a position 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. But as far as targets go, it's been consolidated in the U. S.
Here and I talked about that in the past, so not very many targets there. Western Europe is our focus. And 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 InnerWork and CDF. I mean, it was good fits for us.
We'll take our time to make sure that we make the right moves, that it makes the right strategic It's a right strategic acquisition for the company of where we're going to go and it's not going to be way outside of our lanes. It's going to be in that distribution MSP services type solutions. So you'll see that in the upcoming quarters when you talk about
Great. Well, thank you and I wish you guys good luck.
Thanks, Ed. Appreciate it.
Our next question comes from Howard Group. Please go ahead.
Good morning and congratulations Dale and Drew on a great quarter. It was just wonderful results to see. My question, I have two questions. One is the cloud. Dale, when you started in 2018, you really That was one of the glaring holes.
You had no cloud distribution and you started working on it. I know you just had a project and then you acquired CDF, which had the cloud platform. And I think that's what you've used, but if you could talk about is that project done? Are you satisfied with it? Is there more work to do?
And what has that meant to your revenue growth?
Yes, the project will never be done when it comes to the cloud piece of it because you'll see all the different providers, whether it's Hybrid cloud or how they actually want to transact. But you're correct. I mean, we talked about it for a long time. We finally launched it with Quim Expedition. It is the underlying coding is the same one that CDF used and we actually were going in that direction even before we acquired them.
So it was just a little More acceleration on our side. But if you look at it, we don't track it separately, not because it's so new as far as the dollars go. But 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. So as they move in that direction, you'll see our Our licenses and our sales go from perpetual to subscription based. So it will 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 there's many companies that are just born in the cloud.
So it opens us up for Just more vendors to look at that are just cloud vendors that we could transact with. So it's really we're really new to it that way and so was the rest of the market second half of twenty nineteen. To be able to transact that way, so you'll see us talk about that a lot Q3, Q4 and then probably next year will be the one we started actually Looking and talking about the numbers on it.
Great. So that kind of segues into my second question, which is really Looking at future growth and I think I finally after following you for a couple of years here, finally figured out I mean I'm really paying attention to adjusted gross billings, segment, which really is all of your product movement, whether it's net sales or not. And if I look at that up 48% year over year segment. And up 12% sequentially and you're closing in on $1,000,000,000 in adjusted gross billings. And then I kind of 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, is that I mean that kind of growth rate just isn't sustainable in very many places when you're already at that second half of twenty nineteen. What do you see as the potential? I don't want you to pin you into 48% year over year growth for the next 5 years, but What are you seeing? Are you at the beginning, middle, later stages of that kind of growth? And what's the potential market for the overall business?
Yes. I guess if I look at the macro level and I talked about it in the release as far as look at our next The smallest of the large competitors, you have ScanSource in the 1,000,000,000 of dollar range and Arrow was $30,000,000,000 So 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 these segments. We'll make it disruptive and like we are now, we're being very disruptive to some of our competitors segments. In certain aspects of their divisions, right, whether it's Ingram or Arrow or SYNNEX Tech Data combination.
But so 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. So we are approaching 500 vendors that we've looked at in the last 3 years, and we've only signed 50. So we'll look at I mean, that's over 100 a year. We're nonstop.
We have a full recruit team. And 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. So there's that many coming out of the woodwork, the needs of products sold. The issue is they're it's not even hitting single, it's getting to that single hitting where you're saying, okay, can they move the deal with $10,000,000 to $20,000,000 and that company gets to 50.
We have some in our portfolio that have already done that. And that's just 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. And then jettison the ones that are either the margins going out of the product and you can say, The margins are low already, but that's the business we're in.
And the only thing that the bolster those margins is more service piece of it, which the industry talks about all the time. And you can see in some of our results that we are doing some of that with the CDF Group and we'll bring some of that to the U. S.
Great. And then the The gross profit side of that, do you see that as talk about how you view gross profit as a percentage of adjusted gross billings? Is it a percentage or 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. Then that's Part of the GAAP piece of it, how we actually have to count it for the gapping in the accounting side. But you look at our gross profit growth, you need to track us 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, but that's our goal and we'd love to add some stuff accretive to the business that will get us over that 5 and Keep it going in that direction, but judge us by the gross profit piece of it and then how much we spend out of the gross profit and how much can actually draw to the bottom line.
Are we at that inflection point to scale? No. Do we feel like we're close to that? Yes. That we can really put and show the leverage that the business has where It's really about our vendors.
They launch, they take off, one goes public, next thing you know we're riding that train and you'll see that inflection point where you see more drop through.
Great. Thanks, and once again, wonderful question. Drew, welcome to the team, and a great quarter to start.
Thanks,
Howard. And our next question comes from Walter Rampley. Please go ahead.
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?
Yes, 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. So we look to probably be at that 22.1%, 22.2% for the balance of the year and year end overall.
Okay. That sounds good. And the solar winds company, I mean, they've had Has that spilled over into your business or could you like just talk about that a little?
Yes. 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, so everybody's getting back to the office. So some recovery in Q2, we continue to see Going on, they split off with one of their MSP divisions called Enable and we've signed the contract with them. So we'll actually have the a twofold approach from the legacy SolarWinds and going forward. But yes, they're a good company. They're actually going to do some Retooling of how they go to market with their tools and monitoring.
So I think we'll see some exciting stuff out of that come into Q4. Just like Sophos has been a good we've had solid quarters with them and it's been strong quarters. Sophos announced their Firewall, new firewalls, and that's been just the booster 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, Alfred, and thanks to all the shareholders. I 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. And if you have any requests for me to 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 and thanks to the employees. Everybody's back
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.