Good morning, ladies and gentlemen. 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. Please note that all callers are limited to one question each. If anyone should require assistance during the conference, please press the star zero keys on your touch-tone telephone. 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. Good morning. Welcome to Wayside Technology's fourth quarter 2018 earnings call. Before turning the call over to Steve Dewind, the company's President and CEO, I'll dispense with the customary cautionary language and comment about webcast for this earnings call. We released earnings for the fourth quarter at approximately 5:00 P.M. Eastern Time, Monday, February 25th, 2019. 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. A rebroadcast will be available at waysidetechnology.com/site/content/webcasts. I'd like to remind you that certain comments made in this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to risks and uncertainties that could cause actual results to differ materially.
Additional information concerning these risks and uncertainties is contained in our Forms 10-Q and 10-K filed with the SEC. Wayside Technology Group sees no obligation to update and does not intend to update any forward-looking statements. Our presentation also includes certain non-GAAP financial measures, including adjusted gross billings, non-GAAP net income, and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measure in accordance with SEC rules. You'll find reconciliation charts in the earnings release and Form 8-K we furnished to the SEC. I would like to turn the call over to Steve Dewind.
Thanks, Melanie. Good morning, everyone. Thank you for joining us today to discuss our fourth quarter and year-end 2018 operating results. This quarter and year had mixed results, reflecting that this year was one of transition for the company. On the positive side, our sales and operational teams worked hard to deliver quarterly net revenue growth of 10% year-over-year. Annual net revenue growth of 13% year-over-year. We also closed the year with overall adjusted gross billings on a non-GAAP basis of greater than $509 million, the first time that the company has cracked the half-billion dollar mark. On the negative side, our gross margins in Q4 were squeezed due to competitive pressure and our product mix coming down to 14.7% compared to 16.9% last year, with gross profit dollars for the year decreasing by 1% year-over-year.
As we've mentioned before, our operating expenses increased due to our investing in business development and field sales personnel. Our net income for the year was down 30% due to the declining margin, investment in additional personnel, and separation expenses. Net income for the fourth quarter was up by 54% year-over-year due to factors that include a lower federal tax rate. Wayside's position in the marketplace has always focused on introducing new emerging vendors and technology into the IT sales channel. As you may have seen in recent press releases, we are continuing to do so, having signed several new, exciting emerging technology vendors throughout this year. With our many years of experience, we leverage our technological expertise, our logistical support, and our financial tools to assist these newer vendors in building out their national sales channel.
In Q1, we began to invest in business development personnel as well as a regional field sales team. The business development team has been focusing on bringing new vendors into our product mix. The field sales team has been focusing on expanding and solidifying our reseller network with high-touch sales support. Both efforts have been successful. The numbers of new technology vendors and the increasing revenue from targeted segments of our reseller network gives credence to our approach. We're encouraged by the enthusiasm our reseller partners have shown in our initiative as we make investments now to position ourselves for the future. Our team is focused on delivering results and focusing on what our vendor partners need. We have seen some wonderful results in established vendors reducing the number of distributors they utilize, but maintaining their relationship with us.
We continue to make progress towards our strategic goal of being the go-to boutique distributor for new technology vendors. We continue to have a strong balance sheet and have no debt currently outstanding. The company has historically returned some of our consistent profits to investors as a dividend with a current yield of greater than 5%, and we have once again declared a dividend of $0.17 this quarter. This past quarter continues to show that demand for IT solutions delivered through a reseller channel remains strong, with opportunity for share gains and growth in security, hyper-converged storage, data management, and networking products.
As we continue to add to our product portfolio, execute well with our field and inside sales teams, expand our customer base, and focus on controlling costs and delivering our IT delivery and reporting systems, we are feeling very good about the outlook for this year.
We look forward to sharing our progress on future calls. Let me now hand off to Mike Veasy, our Chief Financial Officer.
Thanks, Steve. I'll review our financial results for the fourth quarter, then discuss our balance sheet and liquidity. Overall net sales for the quarter increased 10% to $49.1 million, compared to $44.4 million for the fourth quarter last year. Lifeboat Distribution net sales were up 17% for the quarter to $44.3 million, while TechXtend net sales for the quarter were down 27% to $4.8 million. As we have discussed in the past, our TechXtend business, which accounts for about 10% of sales, tends to fluctuate from quarter- to- quarter based on the timing of deal flow, but does provide incremental cash flow by leveraging our existing infrastructure. The growth in Lifeboat is more consistent and reflects some initial traction of the expansion of our vendor recruitment and field sales organizations.
These expansion efforts began in January 2018 and added approximately $2 million in incremental expenses on an annualized basis. While this investment was a drag on earnings in 2018 as the teams built their pipelines, we feel it is a critical investment to increase our market share and gross profit on a going-forward basis. Overall adjusted gross billings on a non-GAAP basis increased 6% to $134.3 million from $127 million in the prior year. As discussed in prior calls, we adopted the new accounting standard, ASC 606, Revenue from Contracts with Customers, effective January 1st, 2018. The adoption had no impact on gross profit or operating income, but resulted in a significant portion of our revenue being reported net of cost of sales and increased our gross profit margin percentages.
Gross profit for the quarter decreased to $7.2 million compared to $7.5 million for the same period last year, reflecting the lower sales at TechXtend. Distribution gross profit for the quarter remained consistent with the fourth quarter last year at $6.3 million. As mentioned before, the TechXtend business declined 26% or $300,000 compared to the same quarter last year. Gross profit margin as a percentage of net sales decreased by 220 basis points to 14.7% compared to 16.9% in the fourth quarter last year. The change in gross profit margin was primarily impacted by two factors. First, the change in mix between products that we record net of cost of sales and on a gross basis under the new revenue accounting standard. Second, lower margins on product sales, which we reported on a gross basis.
Regarding the product mix issue, under ASC 606, our gross margin as a percentage of net sales is a composite of items that are recorded net of the related cost of sales or 100% reported gross margin, and items that were recorded on a gross basis, typically reflecting a high single-digit profit margin. The weighting of the two product categories in the composite margin is based on the relative percentage of GAAP revenue in each. During the fourth quarter of 2018, approximately 8.7% of our net revenues were from security maintenance and other products which were reported net or an effective 100% gross margin, compared to 9.9% in the same quarter last year. This change in mix accounted for approximately half of the 220 basis point decline in gross profit as a percentage of net sales quarter-over-quarter.
The gross margin on products recorded on a gross basis declined from 7.8% to 6.6%, which accounted for the rest of the overall decline. This decline is mainly attributable to a high percentage of our product sales being sold through our Lifeboat Distribution segment. Percentage margins on distribution sales are generally lower than reseller channel sales. However, they correspondingly carry a lower incremental sales cost below the gross margin line as well. Total selling general and administrative expenses for the quarter increased by $100,000 to $5.1 million, compared to $5.0 million in the same quarter of 2017. The increase was mainly due to higher personnel costs resulting from the investment in our business development and field sales organizations. SG&A expenses as a percentage of net sales for the quarter were 10.3% in 2018 compared to 11.3% in 2017.
Pre-tax income for the quarter ended December 31st, 2018, was $2.3 million compared to $2.7 million during the prior year, primarily as a result of lower gross profit at TechXtend. For the fourth quarter of 2018, the company recorded a provision for income taxes of $600,000 compared to $1.6 million in the prior year. The company's effective tax rate was 25.4% for the three months ended December 31st, 2018, compared to 44.6% in the prior year. The change in effective tax rate reflects the new federal tax rates enacted as part of the Tax Cuts and Jobs Act of 2017, as well as some one-time charges that were recorded in the fourth quarter of 2017 related to the adoption of the new tax law and state income tax adjustments.
Our effective tax rate for the full- year 2018 is 30.9%, which also reflects additional state tax expenses for states adopting economic nexus statutes and the impact of IRS Section 162 limitations on separation expenses recorded in the second quarter of 2018. As a result, net income for the quarter ended December 31st, 2018, was $1.7 million, compared to $1.1 million for the same period in 2017. Diluted income per share for the quarter ended December 31st, 2018, was $0.39, compared to diluted income per share of $0.25 for the same period in 2017. For the full- year 2018, net income was $3.5 million, down from $5.1 million in 2017. On a non-GAAP basis, excluding separation charges for our former CEO, net income increased approximately 9.5% from $5.1 million in 2017 to $5.5 million in the current year.
The change in tax laws contributed to this year-over-year change as well. GAAP diluted income per share for the full- year ending December 31st, 2018, was $0.78, compared to diluted income per share of $1.13 for the same period in 2017. On a non-GAAP basis, adjusted for the CEO separation expenses, diluted EPS was $1.23, a 9% increase over the prior year. Moving on to the balance sheet. We continue to manage a strong balance sheet and liquidity position with cash and equivalents of $14.9 million at the end of the period, compared to $5.5 million at the end of 2017, and no outstanding borrowings under our $20 million credit facility. We paid approximately $800,000 in dividends during the quarter, and as of December 31st, 2018, stockholders' equity stood at $40.6 million, compared to $38.7 million at the end of last year.
Total working capital, including cash, was $36.2 million, compared to $29.9 million at the end of last year. In addition, our long-term receivable balances of approximately $3.2 million, which are not included in working capital, are available to us as sources of future liquidity. On February 22nd, 2019, the board of directors declared a quarterly dividend of $0.17 per share of its common stock, payable March 13th, 2019, to shareholders of record on March 7th, 2019. In summary, our net income and EPS were up about 54% for the quarter, primarily as a result of the new corporate tax laws. Our pre-tax income was down slightly, primarily due to a soft quarter for the TechXtend business.
However, our top-line growth was solid at 10%, and our results include costs related to the expansion of our vendor recruitment and field sales teams at Lifeboat, which we believe positions us for future growth. We continue to strengthen our cash and equity position while returning approximately 55% of our annual non-GAAP net income, which excludes separation expenses, in the form of a dividend. Steve?
Thanks, Mike. I'm very pleased overall with our team's efforts in moving forward with a focused strategy and energetic pursuit of our goals. These efforts are paying off. With that, operator, let's open it up for questions.
Thank you. Ladies and gentlemen, at this time, if you have a question, please press the star then one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. If you are using a speakerphone, please pick up the handset before asking a question. One moment, please, for questions. Our first question comes from the line of Anthony Maltese. Your line's now open.
Hi, good morning. First of all, great quarter. I believe, speaking selfishly, the stock is severely undervalued, especially given the yield. My question is, d o you foresee any growth coming on an inorganic basis? Are there companies out there, and I realize your market cap is fairly small, are there companies out there that you could be acquiring or looking to acquire as part of your growth?
Let me start with this one. One of my favorite topics, inorganic growth. Since throughout my career at various companies, this has been something that I have focused on. If you look at other players in this industry. Wholesale distribution within the IT channel has always had a mixture of both organic growth and inorganic activity. It is definitely something we are looking at. Frankly, since I got here, the main focus has been on organic growth, structuring to make sure that we are focused in the right areas, making sure that internally we're doing the right things. We thought the first thing we needed to do was strengthen our vendor lineup, and we needed to do that by adding business development resources.
We also then needed to focus on shoring up and tightening relationships with some of the larger resellers in the channel, and we have done that with the focus on hiring and getting out there a new field sales team. Now that we've done those two things, we are beginning to look to see what kind of opportunities exist out there. I will tell you, there are plenty of opportunities. We just need to make sure that they're the right ones. Mike, do you want to add anything to that?
No, I think it's well said. If you want to call it our capital allocation strategy is to, we pay a dividend, and then with excess capital, our first choice would be to find accretive investments to make in our business or adjacent businesses, to build the market cap of our company. Then, should there be none available, the board would evaluate whether we need to return additional capital in the form of buybacks to shareholders, which we have done in the past. Certainly our strategy is to reinvest in either our business organically or, through M&A, if we find accretive opportunities to do so.
Thank you. As a reminder, ladies and gentlemen, if you have a question, please press the star and one key on your touch-tone telephone. Our next question comes from the line of Peter Lux. Your line's now open.
Hi, guys. So far, a nice quarter, I see you're starting to put your own stamp on the business. I have a couple of questions. I'll sort of put it as one question. How consistent do you think the growth of revenue, now that you've established that, will continue?
Thanks, Peter. Consistency in revenue growth, I think that's always a tad, I won't say easier, but it's more forecastable than is the margins. I would say that within this industry, there's no question that there are product areas that are hot, we just need to make sure that we continue to nurture new vendors in these growth areas. For the past couple of years, the biggest single area of growth has been in the security arena, we have done quite well there. There are other areas that we need to be focusing on, that's the reason, Peter, that we've invested in a number of people focused on new business development because they are spending their entire time finding out, searching, qualifying, and wooing these new vendors who are bringing new technologies to the fore.
We've been, I think, blessed by being able to find people that have done quite well and have ridden the newer technology popularity into very strong success and have pulled us along with it. I'm feeling very confident about our ability to continue to find these new vendors, to create alliances with them, then to go out and sort of benefit from the growth that they are seeing that'll be passed along to us as well. The other area that, frankly, we've done quite well in is creating alliances with very strong resellers. If you look at the mix of who we sell our products to, that has shifted a bit in the last 12 months in that we've done quite well in identifying some of the stronger resellers out there and then being their go-to channel for providing new technologies.
Thank you.
Mike, do you want to add anything?
Peter, as you know, TechXtend is more of a transactional business that goes up and down from quarter to quarter. You haven't been watching that a while, and Lifeboat is much more consistent. I think your question was about consistency. The other thing that we keep in mind when we look at it is, we're in a large market with a small market share, and the market's growing. The market, we don't think is contracting. The question is, there's always been historical top-line growth for Lifeboat. What are the opportunities for it to continue? We look at the fact that we're in a very large market with a small market share. New vendors coming into the market all the time, and we compete with the biggest guys in the market, and have shown the ability to win.
Some of the vendors that we announced over the last quarter, Micro Focus and Imperva. The other choices for those vendors are the real big players in the industry. We're able to go up against those companies and win business. In terms of the potential for continued consistent growth at Lifeboat, we think all the necessary factors are there.
Thank you. Our next question is a follow-up question from the line of Anthony Maltese. Your line's now open.
You've had great results. You obviously are very well-spoken. What are your plans for investor relations for the balance of this year? I know I saw you last year at a couple of conferences. What are your plans this year?
Yeah. As you noticed, we w ere out at a couple of conferences last year. I think we'll continue to create market awareness through conferences. We always have follow-ups after the conferences. Then, we'll try and create additional kind of awareness in the analyst community to try and get coverage that way. I don't think there'll be anything outside the ordinary of what we do in terms of investor relations. We do intend to make ourselves more visible. For us, outbound awareness is a big step because our story, to a certain extent, tells itself, certainly from the standpoint that we're a company and technology that's been around for a while, consistently profitable, strong balance sheet. Just telling that simple part of the story and creating awareness is step one for us.
Then as we're able to kind of develop and get a track record with our strategy, we can work beyond that and hopefully pick up some third-party analyst coverage to support us. That's our plan and our hope. Of course, it takes a little bit of time to get all the wheels moving effectively on that.
Yeah. We expect, on average, to be presenting at a conference about once a quarter at a minimum.
Well, you keep putting up good numbers and you'll get attention, obviously, and it'll make it a lot easier to tell the story.
Great. Thanks, Anthony.
Thank you. Once again, ladies and gentlemen, if you have a question, please press the star then one key on your touch-tone telephone. Our next question is a follow-up question from the line of Peter Lux. Your line is now open.
This one I think it would be a good idea to make your income statement a little more less convoluted with all the charges and credits. As in a follow-up, what was the ultimate net charges, and what did it cost the separation agreement? How much did that impact the income statement? Is that a one-time thing that is now finished going forward?
Yeah. Hey, Peter. I was going to say, we'll do our best not to have any more separation expenses. The charge at the operating income level was $2.4 million and at the net income level, it's $2 million. Okay? It was $0.45 on the EPS. The net EPS impact was $0.45. $0.45 EPS, $2 million net income, $2.4 million pre-tax income, if you want to look at it that way.
One time or ongoing?
It's all one time. All the charges are accrued for this year for that event.
Thank you. At this time, there are no further questions. Please continue with any further remarks.
Well, we sure appreciate all the support that we've been given by our shareholders. I must say it is fascinating to me to see the interest that people have in our stock, in the company itself, and the loyalty that people have. Holy smokes, we've got a lot of stockholders that have been shareholders for a long time. We've been very pleased with the reaction in the last two days. I'm looking right now. It's currently trading at $12.38. Thank you all. Mike, do you have anything further? I don't.
No, sir.
Okay. Thank you very much. We look forward to talking to you next quarter.
Ladies and gentlemen, this concludes today's conference call. You may disconnect at this time, and thank you for your participation.