Good morning, everyone, and thank you for participating in today's conference call to discuss Wayside Technology Group's financial results for the fourth quarter and full year ended December 31, 2019. Joining us today are Wayside's CEO, Mr. Dale Foster, the company's CFO, Mr. Michael Vesey, the company's Vice President of Alliances for Lifeboat Distribution, Charles Bass, and the company's outside investor relations advisor, Sean Mansouri, with Gateway Investor Relations.
By now, everyone should have access to the fourth quarter and full year 2019 earnings release, which went out this morning at approximately 8:30 A.M. Eastern Time. The release is available in the investor relations section of Wayside Technology Group's website at waysidetechnology.com.
This call is also available for webcast replay on the company's website. Following management remarks, we'll open the call for your questions. I would now like to turn the call over to Mr. Mansouri for some introductory comments.
Thank you, Jean. Before I introduce Dale, I'd like to remind listeners that certain comments made in 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, generally, 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 speak 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, Adjusted EBITDA, net income, excluding separation expenses, and non-GAAP earnings per share 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 release and Form 8-K we furnished to the SEC this morning. Please be advised that the company, its directors, and certain of its executive officers are participants in the solicitation of proxies from the company's shareholders in connection with the 2020 annual meeting of shareholders. The company intends to file a definitive proxy statement with the SEC in connection with any such solicitation of proxies.
Shareholders are strongly encouraged to read such proxy statement and all other documents filed with the SEC carefully and in their entirety when they become available, as they will contain important information.
Information regarding the identity of the company's participants and their direct or indirect interests by security holdings or otherwise, can be found in the soliciting material filed by the company with the SEC on January 15th, 2020, and updated information will be set forth in the company's definitive proxy statement and other materials filed with the SEC.
These materials can be obtained for free through the company's website in the section Invest or through the SEC's website. With that, I'll turn the call over to Wayside CEO, Dale Foster. Dale?
Thank you, Sean, and good morning, everyone. 2019 was a banner year for Wayside, highlighted by our strongest levels of net sales, gross profit, and net income in company history. This is also our first year since 2011 of generating double-digit growth in gross profit, which is a primary metric we use to track our top-line performance.
These strong results reflect the continued execution of our simple yet highly focused strategy. We began the execution of this strategy in 2018 by adding emerging technology vendors to our offerings across both core and new market segments while deepening our current relationships and winning with new customers.
This refined approach has benefited from the investments we made to restructure our vendor alliance team for new vendor recruitment, the build-out of our sales team, and new sales team structure incentive programs that better align our interests and our economics with our partners and customers.
Since I joined the company in 2018, the central element to the strategy has been our shift to a sales-driven organization through our Lifeboat Distribution business. Our execution of this pivot over the last two years has enabled us to return to consistent growth on both top and bottom line. Before discussing the quarter and year further, I'd like to pass the call over to Charles Bass to discuss our technology vendor and marketing highlights.
From there, Mike will walk us through the financials, and when I come back to discuss the key highlights for the quarter and year-end, as well as goals and objectives for 2020 and beyond. With that, I will turn the call over to Charles Bass.
Thanks, Dale. Speaking on our vendor development, we continue to effectively assess and onboard the right emerging technology partners to broaden our product suite. We've placed a strong emphasis on targeting brands with products that complement our current offerings. That's reflected by our new partnership with SecurityScorecard.
They're a cybersecurity ratings provider. As we began to introduce SecurityScorecard to our partners, many have found that their offerings are an excellent complement to other security products that they resell. We see great potential for cross-selling their brand's products with our current security offerings. SecurityScorecard is an outstanding example of just the type of vendor that we'll continue to recruit and onboard.
We have been diligent over the last two years in developing and executing our new alliance strategy, which centers on identifying, evaluating, and then onboarding high-potential emerging tech partners. We've now begun to align our marketing organization with this same strategy.
Over the past year, our marketing team has taken a sales enablement approach, offering broad, cost-effective marketing services to our partners. Ultimately, we believe that when our partners win, we win, and this commitment sets Lifeboat apart from our larger competitors, and it's the core of our alliance and marketing goals. I'd like to turn the call over to Mike Vasey to provide more details on our financial results. Mike?
Thanks, Charles, and good morning, everyone. Jumping right into our fourth quarter results. Net sales in the fourth quarter of 2019 increased 24% to $60.9 million, compared to $49.1 million for the same period in 2018. Lifeboat Distribution segment net sales in the fourth quarter increased 30% to $57.4 million, compared to $44.3 million.
TechXtend segment net sales for the fourth quarter were $3.5 million, compared to $4.8 million. Adjusted gross billings, a non-GAAP measure, increased 25% in the fourth quarter to $167.5 million, compared to $134.3 million for the same period last year.
As we have stated to many of our shareholders in the past, the most appropriate metric to gauge our growth is gross profit given the unique revenue accounting treatments in our industry. With that said, gross profit in the fourth quarter increased 9% to $7.9 million, compared to $7.2 million for the same period in 2018.
The increase was driven by our primary business segment, Lifeboat Distribution, which benefited from our continued execution in adding new technology vendors and continuing to deepen our relationships with current clients to drive organic growth. Total SG&A expenses in the fourth quarter were $5.3 million, compared to $5.1 million in the year-ago quarter.
As a percentage of net revenue, SG&A decreased 150 basis points to 8.8%, compared to 10.3% in 2018, demonstrating the scalability of our business as we continue to leverage the investments we made in 2018 by expanding our field sales and vendor recruitment presence, which in turn has increased gross profit without a proportionate increase in G&A. Net income in the fourth quarter of 2019 increased 16% to $2 million, or $0.45 per diluted share, compared to $1.7 million, or $0.39 per diluted share for the same period in 2018.
This quarter, we have introduced Adjusted EBITDA as a non-GAAP metric, as we believe it is a useful supplemental metric to assess our profitability and company value. In the fourth quarter, Adjusted EBITDA increased 11% to $2.9 million, compared to $2.6 million in 2018. The increase in Adjusted EBITDA was driven by organic growth with existing clients and new vendor additions, coupled with prudent cost management and operating efficiencies.
Effective margin, which is defined as Adjusted EBITDA's percentage of gross profit, increased 90 basis points to 37.1%, compared to 36.2% in the prior period. On February 18th, 2020, the company declared a dividend per share of $0.17, which was paid on March 6th to shareholders of record on March 2nd, 2020. Quickly running through our full-year results. Total net sales in 2019 increased 15% to $208.8 million.
Lifeboat Distribution segment net sales increased 18% to $193.6 million, TechXtend segment sales declined to $15.2 million compared to $17.9 million. Adjusted gross billings in 2019 increased 18% to $601 million, compared to $510 million in 2018. Gross profit in 2019 increased 11% to $30 million, total SG&A was down 6% to $21.5 million compared to the prior year.
As a percentage of revenue, SG&A decreased 220 basis points to 10.3%. Net income in 2019 increased 92% to $6.8 million, or $1.51 per diluted share, Adjusted EBITDA increased 14% to $10.5 million, compared to $9.2 million in 2018, reflecting nearly 50% flow-through from our growth in gross profit.
Note that the 2018 net income included $2.4 million of separation expenses related to an executive's departure. Non-GAAP net income, excluding separation expenses, net of taxes in 2019 increased 24% to $6.9 million, compared to $5.5 million last year.
Effective margin also increased 70 basis points to 34.8%, compared to 34.1% in the prior year, further reflecting the scalability of our business. Dividend per share declared in 2019 was $0.68, which is consistent with the prior year. We continue to maintain a strong balance sheet and liquidity position.
Cash and cash equivalents were $15 million at December 31st, 2019, compared to $14.9 million at December 31st, 2018, and we remain debt-free at both December 31st, 2019, and December 31st, 2018.
Also note that we earned a Return on Invested Capital of 24.5% for the year, demonstrating the capital efficiency of our software distribution business model. This concludes my prepared remarks, and I'll turn the call back over to Dale.
Thanks, Mike. I'd like to discuss some of the key highlights and initiatives that we have continued to execute for approximately the last two years, as this is what has led Wayside back to its strongest levels of growth and profitability in many years.
As we have previously discussed, we made fundamental changes in 2018 that positioned Wayside as a sales-focused organization. This year, we made further enhancements to our sales model to better incentivize our teams across the country. This change in team structure and compensation allows us to closely simulate our vendor and customers' go-to-market strategies.
As Mike mentioned, we continue to generate strong growth with both new and existing partners during the fourth quarter. In December, we brought in, which we believe is the largest booking in company history, without naming names, this franchise is a favorite of fast and healthy Mexican food.
From a vendor perspective, we are experiencing growth in both core and new verticals. Keeping in mind our goal to onboard and cross-sell new vendors to overlay and supplement our existing core vendors.
Our ability to leverage the expertise and insight gained in our core verticals to deliver growth for the first time in new areas like connectivity speaks volumes to the quality of our team and the process in place today.
Our success with new vendors and new verticals has significantly aided our efforts to deepen relationships with current customers and grow our overall customer base. With all of this said, it is clear that our improved results for 2019 underscore the validity and scalability of our investments these last two years.
Before I get into key objectives for 2020, I'd like to briefly discuss the unsolicited proposal we received from N&W Group last year. On December 10th, 2019, we received a preliminary unsolicited proposal from Shepherd Kaplan Krochuk and North & Webster to acquire the company at $16.38 per share, subject to certain conditions.
Although the N&W Group's offer had expired on December 16th, 2019, the Board took extensive measures to evaluate their proposal, including engaging Stifel Financial Corp. to act as a financial advisor to the Board. Wayside management members and the Board of Directors and Stifel engaged with the principals of N&W Group on multiple occasions to discuss their expired bid.
After a thorough review of the inbound inquiry and consultation with our advisors, the Board determined the expired bid was not in the best interest of shareholders and did not serve as a basis for further diligence or discussion.
This was communicated to N&W Group on February 11th, 2020. The Board had engaged in constructive dialogue with N&W for several months prior to receiving their proposal, as the Board and our management team are always open to receiving constructive input toward our goal of increasing long-term shareholder value.
Additionally, the board engaged an investor relations team at Gateway Group in the fourth quarter of 2019. This further demonstrates our commitment to building a robust, regular, and ongoing shareholder engagement program. As I mentioned, Wayside is in its early innings of the next stage of growth.
I joined the team just over two years ago and took over as CEO last month. You can see from our results, we are moving towards an inflection in our business that has us generating double-digit growth on both the top and bottom line, with significant portion of our growth and gross profit flowing through to pre-tax income.
There are also many opportunities for us to accelerate this growth through M&A, which the company has not evaluated in the past. I want to thank our teams at Wayside for their dedication and hard work to get us to this point.
I'd also like to thank the shareholders for their patience over the last five years while the company had flat to even declining performance at times. I believe your patience will continue to pay off as we embark on this next evolution of growth. Lastly, I'd like to thank our board of directors for entrusting me with running the company.
They have been very supportive of my go-forward plans from the day I took over. We now have a deep board expertise in finance, compliance, M&A, industry-specific knowledge, and strategic planning.
It has been a pleasure to work in lockstep with them. As we look to 2020, we plan to carry our strong momentum through this year and drive sustainable, profitable growth through our Lifeboat Distribution business.
From a product perspective, we will continue to deepen our presence in the core verticals while delivering growth in newer verticals like cloud and connectivity. We will also remain opportunistic in terms of capital allocation for M&A and strategic opportunities. With scalability in our business model, we continue to believe that we can flow through a significant portion of our growth and gross profit to pre-tax income.
We look forward to further executing on our strategy and delivering value to all Wayside shareholders in 2020 and the many years ahead. Operator, we'll now open this up for questions. Thank you.
Thank you, sir. Participants, to ask a question, you will need to press star and then one on your telephone. Again, that will be star and then one on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question will come from Edward Woo from Ascendiant Capital. Your line is now open.
Yeah. Congratulations. Obviously, you guys had very strong growth in the fourth quarter. What kind of momentum do you think is going to continue to drive it into next year? Was it any particular vertical or any particular product or any particular segment?
Thanks, Ed, for the question. It's not. It's just continuing doing what we need to do every day. That is look at new technology vendors or software partners that are out there that we can add and then get deeper with our customers.
We always say we want to sell multiple products to one customer instead of one product to multiple customers. As a specialty distributor, we want to keep going deeper with the customers that we have. It's just continuing executing on that strategy and not stop, right? We're just going to keep doing what we're doing as we grow as a company.
Great. The next question I have is, you mentioned M&A opportunities. Has that been a strategy in the past? If you are considering it, what kind of opportunities will you consider? Will you consider new business areas or pretty much an expansion into the areas that you're in now?
I can only talk for the last two years. I don't think it's been a strategy for the company, if you look back over the last 10- 15 years. It's something that's definitely on our plate to look at. If we were to look at targets, they would fit into an adjacent market. A lot of the targets have been rolled up over the last really 10 years in the distribution space.
We would look at something in an adjacent market or something that's close aligned in the market we're in. We won't go way outside of those lines. It's something we're going to look at and continue to look at because we're in the software business, the cloud market everybody talks about, that we're looking at as well. Yeah, it's definitely something that the board has looked at, and the management team here, we talk about it in almost all the meetings.
Great. Well, thank you, and good luck.
Thanks, Ed.
Your next question comes from the line of Josh Peters from Zenith Sterling. Your line is now open.
Yes, good morning. I'd also like to offer my congratulations. Quite a turnaround in the business here. Wanted to talk about the trajectory of sales versus gross profit. I definitely agree from an analytical perspective that it's better to evaluate the progress of the business in terms of gross profit dollars rather than billings or revenue. Should we be assuming, or I should say, are you assuming that that gross profit margin kind of on a more traditional basis is going to continue to decline over time?
Hey, Josh, this is Mike. The answer is it may. A higher percentage of the products that we distribute now are digital in nature. A lot of them are security software products, network management products, renewals of licenses and subscriptions for those products. The incremental cost of delivering an extra license or renewing the license is comparatively low to some of the legacy products.
The way we look at it is these are really the growth segments of the software industry. The fact that we can participate in those new and evolving growth segments and grow profitably and bring a healthy percentage of each dollar of growth to our bottom line, to us, is a positive.
That's why we're trying to make sure people look at our ability to really take advantage of the opportunity to grow along with a vibrant market, and make money while the percentage margins may be low, lower than some of the legacy hardware-based products in the past.
Okay, that's helpful. I want to tie that back to long-term Return on Capital. The big investment that you've got in the business here is obviously receivables offset by payables to a large extent, but still a pretty significant net investment.
As Lifeboat has really grown here the last few years, it looks like at least the current receivables line, it's growing more in line with the billings number or the net sales number as opposed to the gross profit dollar number.
Can you restrain the growth of that net investment in receivables so that it stays in line with gross profit dollars or operating profit dollars? My fear is that the growth is going to eat up a lot of capital absorbed into receivables over time.
Yeah. There is a relationship between pricing and terms between both our suppliers and our customers, so we need to continually manage that. We evaluate the return that we're getting based on any capital we invest in our business and make sure that that's adequate.
Then we also look at it from the point of view that the beauty of our business is that, it is capital light and we'd expect our EBITDA less taxes or interest, if we have it at some point in time to approximate the free cash flow in the business.
That's not necessarily every quarter or maybe not even every year, but over the long term, we think we could manage our working capital to get both an acceptable level of return and then also have the free cash flow from the business approximate the earnings less tax.
Okay. Just so that I'm clear on that, because I think that's a pretty important point here going forward. For free cash flow to approximate net income, that implies that you're not really investing additional working capital from this point forward, even as you're continuing to grow revenue. Am I understanding that correctly?
It should be minimal. Okay? There could be some, but over time, you would make it up in the next year. We don't expect it to be a high % of the increase in our net income.
Okay. Finally, on the rejection of the N&W offer, I know you may be limited in terms of what you can communicate about this, and honestly, I agree from the standpoint of a shareholder, I think the offer was too low. Could you provide any additional color or insight into how you're evaluating the long-term value of the business?
What other sorts of comparable valuation multiples for similar businesses that you may have looked at or other valuation techniques? I just want to get a little insight into your thinking there to round out some of my own thoughts.
Yeah. We don't want to get into a discussion of specifically how we view value in our business. It's kind of more the domain of our investors. We did hire professionals, looked at it in a number of different ways. Generally speaking, it's not different than most people would look in our business. It's the things that you mentioned.
It's the discounted cash flow of the business. It's the how it compares to market multiples and also M&A multiples that happened in the industry and all the standard criteria that were applied to it. Without getting into anything specific, we consulted with professionals and looked at a number of different metrics, I think is the way to view it.
Okay, that's very helpful. Looking forward to another good year here in 2020. Thank you.
Thanks, Josh.
At this time, this concludes our question and answer session. I would now like to turn the call over back to Mr. Foster for closing remarks.
Thanks everybody for joining us today on the call just to hear about our 2019 results and Q4 results. We appreciate our shareholders and look forward to a good 2020 going forward. I appreciate it. Thank you.
Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.