Good morning, ladies and gentlemen, and welcome to the Wayside Technology Group conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. 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 touchtone 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 second quarter 2015 earnings call. Before turning the call over to Simon Nynens, the company's Chairman and Chief Executive Officer, I'll dispense with the customary cautionary language and comment about the webcast for this earnings call. We released earnings for the second quarter at approximately 5:00 P.M. Eastern Time, Thursday, July 30th, 2015. 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, and a rebroadcast will be available at www.waysidetechnology.com/earnings-call. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, July 31st, 2015. A detailed discussion of risks and uncertainties are discussed in our Form 10-Q, and also in greater detail in our Form 10-K. Wayside Technology Group Inc.
sees no obligation to update and does not intend to update any forward-looking statements. Now I would like to turn the call over to Simon Nynens.
Thank you, Melanie. Good morning to everyone. We had a solid second quarter. Revenue increased 9% and gross profit increased 5% over the same period last year due to continued strong performance from our Lifeboat Distribution team. We continue to invest in our future growth, and we are pleased to announce that we have recently opened a Lifeboat Distribution sales office in Mesa, Arizona, to enhance customer service for our Midwest and West Coast customers. Our Lifeboat division represented 88% of our revenue and 82% of segment income in the first quarter. Cash and long-term receivables were $24.4 million and represented a very healthy 63% of equity as of the end of June. Working capital amounted to $32.4 million, representing 84% of equity as of the end of June.
Regarding cash flow and capital, we are very fortunate to be in a position to continue to return capital to our shareholders. This quarter, we bought back approximately 13,000 shares and paid out $810,000 in dividends. Looking at the future, we continue to invest in the growth of our business. As you can see from our press release, our overall overhead costs were equal to last year. Our share-based compensation was also similar to last year. As announced in Q3 of last year, we have expanded our sales services to include a field sales team as well as a professional services team. This resulted in an increase in selling costs of about half a million dollars in this quarter. We expect these investments to support and accelerate future sales and gross margin growth.
As a percentage of net sales, SG&A expenses for the second quarter were 4.8% compared to 4.7% for the second quarter of 2014. We are excited about the prospect of more software publishers joining us. We have a good pipeline of opportunities. Customer and vendor feedback confirms that we're on the right track. Our customer service is outstanding. Now, I would like to hand it over to Bill Botta, our Executive Vice President.
Thank you, Simon. As noted in our release, we had a good quarter overall, with revenue up 9% and gross profit up 5% year-over-year. Our Lifeboat business grew 16% in Q2 to $81.3 million, compared to $70 million in Q2 of 2014. Our TechXtend segment retracted 26% when compared to the same period last year due to a continued decrease in our extended payment term transactions. Gross profit for our Lifeboat segment in the first quarter was up 11% to $5.1 million versus $4.6 million in the same period last year due to an increase in sales volume and deeper account penetration into strategic accounts. The TechXtend segment had a higher percentage of GP compared to last year, declined 14% due to the lower volumes.
We made a lot of progress towards our goal of expanding our sales organization with the opening of our Mesa, Arizona, office as an extension of our inside sales team to better serve our Mountain and Pacific Time Zone customers. This office opened in July and is now operational and should be at expected staff levels for 2015 by early August. The feedback about this new coverage model from our West Coast customers has been excellent. As Simon indicated, our total selling general and administrative expenses is up year-over-year due to our investments in the field sales organization, expansion into Mesa, Arizona, and beginning to build our services business. We were able to keep our net income nearly flat year-over-year and nearly overcame these increased SG&A costs while positioning the business to have the opportunity for continued growth this year and next.
We continue to execute against our plans in Lifeboat and TechXtend and are now focusing on accelerating the addition of new product lines in the second half. We continue to manage our expenses and build our product portfolio to help achieve our continued growth targets. Thank you. Simon, back to you.
Thank you, Bill. Kevin Scull will now report on the financial numbers. Kevin?
Thank you, Simon. Good morning to our investors, analysts, and employees. I will discuss our second quarter financial results both on a consolidated basis as well as by business segment. Net sales for the second quarter of 2015 were $92 million. This is compared to $84.4 million in Q2 last year, representing a 9% increase on a consolidated basis. Sales for our Lifeboat Distribution segment were $81.3 million and represent 88% of our total revenue during the quarter. Lifeboat sales reflect a 16% increase compared to the prior year. This increase in sales in the Lifeboat segment was mainly a result of the addition of several key product lines and strengthening of our account penetration. Sales for our TechXtend segment were $10.7 million, compared to $14.4 million in the prior year, representing a 26% decrease.
The decrease in net sales in the TechXtend segment was primarily due to both a decrease in extended payment term sales transactions and larger sales transactions as compared to the prior year. On a consolidated basis, our gross profit was $6.4 million, compared to $6.1 million for the second quarter of 2014, representing a 5% increase. Our gross profit margin for the quarter was 7%, compared to 7.3% in Q2 last year. Lifeboat Distribution's gross profit for the quarter was $5.1 million. This compared to $4.6 million in Q2 last year, representing an 11% increase. This increase was primarily due to higher sales volume in the current year. Our TechXtend segment's gross profit was $1.3 million and decreased by 14% compared to last year. The decrease in gross margin for our TechXtend segment was due to lower sales volume.
Total selling general administrative expenses were $4.4 million, compared to $4 million in the prior year. This increase is primarily the result of an increase in sales-related employee and employee-related expenses, salaries, commissions, bonuses, and benefits in 2015 compared to the prior year. A large part of this increase is due to us hiring the field sales team and a professional service team. We expect these investments to support and accelerate future sales and gross margin growth. Our net income for the quarter was $1.4 million, compared to $1.5 million in the prior year. Earnings per share on a fully diluted basis were $0.29 per share compared to $0.31 in the prior year. Moving on to the balance sheet. Compared to our year-end balance sheet, the following key accounts had fluctuations.
Cash was a healthy $18.9 million at the end of the quarter, compared to $23.1 million at December 31st. This decrease is primarily composed of stock purchases of $2.8 million and dividend payments of $1.6 million. Accounts receivable, current and long-term, decreased by 10%. This decrease is primarily due to a lower level of sales as compared to the fourth quarter of 2014 and fewer extended payment term transactions in 2015 as compared to 2014. Accounts payable and accrued expenses decreased by 16% due to lower sales volume compared to the prior year, and an increase in early payment discounts taken by the company in the current year. The company has no debt. We do, however, have a $10 million revolving credit facility that can be used for working capital purposes, including financing of larger extended payment term sales transactions.
At the end of the quarter, we have no outstanding balance under the credit facility. Working capital at the end of the quarter was $32.4 million. During the quarter, we repurchased approximately 13,000 shares of our common stock. We still have authorization to buy back approximately 549,000 shares. Our stockholders' equity now stands at $38.6 million. At our July 29th, 2015 board of directors meeting, the board declared a dividend of $0.17 per share for its common stock, payable August 17th to shareholders of record on August 10th. In conclusion, the company continues to have solid operating results, a strong balance sheet, and is adequately capitalized to support our future growth plan. Simon, I turn it back to you.
Thank you, Kevin. Operator, we can now start with the Q&A session.
Thank you. Ladies and gentlemen, at this time, if you have a question, please press the star then 1 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 speakerphone, please pick up the handset before asking a question. One moment, please, for the first question. Our first question comes from the line of Sam Shafer. Your line is now open.
Yeah. Good morning, gentlemen. Thank you for taking my call. This is actually Jeff Gagan. Kudos to you for driving that top line. It's been very impressive to watch over the last four or five years.
Thank you.
Simon, can you talk a little bit about the pipeline of software offerings and how we should think about that with the potential impact?
Yeah. Like I said, we have a good pipeline of opportunities ahead of us. With the field sales team, but also hiring a Director of Business Development, we're really exploring expanding our offerings into several different markets. And I'll let Bill Botta expand to it, then I'll come back to it after Bill's comments. Bill?
Yes. Thank you, Simon. Hello, Jeff. I think one of the keys is we've begun to focus on new vendor relationships by adding Brian Gilbertson, our Senior Director of New Vendor Business Development, who joined us about eight weeks ago, coming over from many years at Arrow Enterprise Computing Solutions, where he ran the virtualization segment. We have our roots in virtualization, as you may recall, and so we're looking at ways to expand our portfolio into the new converged technology space and be able to provide our reseller partners more of a solution orientation than a product orientation. This also couples well into the utilization of our engineering resources to assist them in coming on board with these new technologies, both of which will drive new revenue streams for us.
We're also looking at adjacent markets that we haven't been in very much, in the Linux and Unix space and the associated open source capabilities that are there. Those are adjacent markets to what we've been doing, and again, will provide new revenue streams. Brian has compiled a very solid list. We have some that we're trying to get into the boat, if you will, this quarter. But many of those vendors, we've also already formed and contracted on the TechXtend side, again, to expand that solution portfolio along with services. That's the direction. Did that address your question?
Yes, it did. I had a further question for you, Bill, unless Simon wanted to add comments to that.
No, I'm good.
Great. Thank you. Bill, it sounds like your Mesa, Arizona office went live in July. Is that right?
Yes.
As we look forward, what kind of impact should we expect as a result of having a presence in Arizona serving Mountain and West Coast?
The way we've looked at this is that the analysis that we've done on the East Central, Mountain, and West showed a much larger revenue stream in those two areas. Having been a West Coast LAR for 10 years, I know that when I reached out to my distribution partners, I always had someone who could work with me and process my orders. Because we've only had a physical presence in New Jersey, we covered some later hours, especially at month-end, quarter-end, but it's in the day-to-day process. This is part of our expansion, and we were going to increase our sales organization, providing additional coverage on a per territory basis.
When we looked at that analysis, we determined that if we're going to add people, a second person into Southern California or Northern California or Northwest, et cetera, then let's put them on the West Coast, where we're not fighting a shift differential with people and their families who are effectively working eleven to eight or eleven to nine, because they tend to want to move back into their local time zone, especially people with kids. Phoenix being the largest call center city in the country, I believe, with many, many major corporations here, the opportunity for talent is much larger. We already have people in the office working. We have one of our staff members moving out from New Jersey to position here. We have some additional experience level here and additional staff members who are in training back in New Jersey now.
As I said, by early August, mid-August, we'll be at our planned staffing levels for this year and do expect an uptick in that business.
Great. Thank you for the color. Simon, I had a question or two more. May I go on, or do you want me to jump back in queue?
No, that's fine. Go ahead.
Okay. Bill, both you and Kevin used the term account penetration, I think that's intuitive enough, can you describe a little bit more what you mean by account penetration?
Sure. Happy to do so. In our business, at the transactional level, the inside team interfaces with and transacts with individual sales reps at our partners and with the buyers who are placing purchase orders. In order to be strategic and increase our visibility into these reseller organizations, our field sales team is working from the top down in those organizations, going face-to-face, understanding what their business is and how our efforts can help them increase their revenue and profits on a per transaction basis by adding additional things into the solution mix. Introducing new products to these strategic partners is much easier from the top down than from the bottom up. One of the reasons we invested in this earlier is to build those relationships so that as we add products and services, we have a willing audience to our proposition in how to do that.
It's very key as we do that. One final addition to that is that the field sales team are working very closely with their counterparts at our vendors. They join call, they do account mapping, they build relationships with our strategic vendor partners, that we're able to be the go-to distributor when that person has any ability to select who they're going to work with at a particular reseller.
I appreciate it. Empirically, I would think that penetration would help improve margin. Is that a fair way to think?
Not necessarily.
Over time?
In terms of the margin, that doesn't necessarily have to impact the margin. There are some larger lines. For instance, if we lead with a small, specialized product, they could say, "You know what? I'll buy the larger line from you," I'm making this up, "a security product that carries typical lower margins from you as well." What we try to do is be more of that solution-focused distributor who can also take these other products from you. We're trying to expand into that sector.
Great to know. Kevin, it looks like your AP declined by about $10 million or $9 million or so. Is that a change in your policy or more of a timing issue?
I think it's a timing issue, and we also have started to take advantage and reach out to vendors to get early payment discounts because we just think it's a good use of our cash.
Yeah. It's also end-of-year business versus second quarter business.
Got it. Simon, in conclusion, I think as I've talked to other investors about your company, you guys do an awful lot of things really well, so I congratulate you on that. There is some concern about margin and where that ultimately goes. Can you provide any kind of a sense of where the bottom on either operating or net margin on the business might be at some point in the future?
Yeah. If you look at our margins since 2014, that 7.7%, and I'm talking quarters here.
First quarter, 7.7%. Second quarter 2014, 7.3%. Third quarter, 6.8%. Fourth quarter, 7.4%. This year, first quarter, 6.9%. Second quarter, 7.0%. We really try to drive that operating income on the long term. We said we're going to invest in Q3 last year. The good thing is we're adding selling costs. We just have to make sure that the investment in selling costs somehow also keeps trend with the gross margin that we generate. We are trying to build a model that is profitable, the net income percentage, and drive that ultimate number. I think we fell in that trap before, years ago. We said, we don't do low margin, high volume lines. I think it had hurt our business.
Although I think there is not that much of a decline more coming, I think the decline has leveled off, as you can see from the previous years. By the way, the professional services that we're adding should also have an effect on those gross profit margins. I do think if we have the opportunity to add a solid vendor to sell solid products to our solid customers, meaning not a lot of credit risk, at lower margins, we should not shy away from that.
All right. I appreciate it.
I thought.
I'm sorry. Do you have other comments?
I know it's not a clear-cut answer as like, it should be around seven or around eight, but I just hope that everyone understands that ultimately, we drive the overall growth of the company, and we drive the return to investors. That's a mix of how efficient can we take business and at what margins does that have to be.
Thank you very much for the color. I appreciate your time, Bill, Kevin, I want to wish you guys good luck going forward.
Thank you. Have a good weekend.
Thank you.
Thank you. Our next question comes from the line of Aaron Lehmann. Your line is now open.
Hi, it's Aaron Lehmann, a longtime shareholder, and happy at that. Somewhat unhappy the fact that, here's a company that has been around for quite a while, muddling through and in some cases really growing significantly, but the story's totally silent to the investment community. Are there any plans afoot that will give you more exposure to investors in general so that we can see a greater appreciation going forward?
First of all, a word about our stock performance compared to our larger competitors. If you track our stock in any Google Finance or anybody, Yahoo or any of those stock symbols can do that for you. You can see that we actually fared quite well without that lack of investor relations, as you said. We've looked at that. Paid research no longer pays off. We do reach out. I have plans again to attend investor meetings. I have them planned here in New York. The paid research no longer pays off, and I think the execution has shown in our share price, by the way, this year has gone up significantly. I don't think we're muddling.
I think our share price increased significantly this year. It should have increased significantly as our performance as I think being stellar, especially considering the fact of the overall IT environment and the overall broad distributors. The growth that they're showing versus the growth that we're showing. I'm actually quite happy with the results so far. We're here for the long term. I hope this trend will continue.
Okay, thank you.
You're welcome.
Thank you. Ladies and gentlemen, as a reminder, if you have a question, please press the star then 1 key on your touch tone telephone. Our next question comes from the line of Natalie Pescu. Your line is now open.
Hi. Good morning, everyone. Thank you for taking my call.
You're welcome. Good morning.
Great. I just wanted to ask a couple questions about your service. I think you're going the right way by becoming more service-oriented in this field. Can you talk a little bit about how, like for example, with the Veeam products, how those performed? Did they hit expectations and the growth with other vendors and offering these kind of tailored products for these vendors?
Yeah. We can talk sector-specific, but we do not discuss publisher individual performance. As I'm sure you understand, that's private information to them. Bill can definitely give you a color in terms of the overall virtualization and security environment. Bill?
Great.
Yes. Thank you, Simon. Good morning, Natalie. What we're building is a value proposition around the services. While we've announced some vendor-specific services, we are in the process of working with other vendors to do the same thing so that we can create SKU-based services available to the resellers. Because especially the larger account resellers, their sales reps are working off of that basis. When they sell a product line, they generally don't sell services. If we offer them a way to make significant margin while we retain significant margin and add a remote installation or a health check type of service, they can be taught how to basically add fries with the hamburger, right? Add this to every quote, get your end user to begin the discussion.
As we expand this across multiple vendors, we create a value proposition with the reseller that differentiates us from other distributors.
In the past, we did this with Alternative Technology. It was tried to be replicated by many other distributors. They weren't very successful at it and took their services in a different direction. We believe there's still a large opportunity where the resellers will embrace this and create additional loyalty to what the Lifeboat brand already has and loyalty from the customers.
Okay, great. It sounds like a good strategy going forward. My second question was just having to do with electronic cloud distribution networks, kind of where you're feeling right now about that as a threat and how you're combating it essentially.
I'm sorry. I couldn't hear the question clearly. Could you restate it?
Oh, I'm sorry about that. If you could talk a little bit about how the company plans on providing value with the threat of electronic cloud distribution networks with vendors giving these products over the internet, how you're viewing that, because there's opportunity there, but there's also a threat. If you could just expand a little bit on that.
Sure. There's an evolution taking place, and all the distributors are trying to figure out how they play in the cloud when they stop delivering physical products, and the vendors are selling hardware products and infrastructure products directly to cloud providers. In our particular model, because many of our vendors are already migrating or adding subscription-based licensing models to their perpetual license, many of our traditional resellers have become more of a hybrid in making their business decisions about where they place their bets in cloud on storage or combined hosting and storage, et cetera. We work with many MSPs today delivering those subscription license and doing the billing for the vendor to this group of resellers with detailed information about their end users so they can consolidate billing. We're kind of evolving into that. We're gonna continue to watch it.
In the distribution space today, there's not very many people who have overcome their investments yet, right? The same thing with the software vendors. It's a growing and significant piece of their revenues, but it's not still carrying them. The perpetual license model is still carrying them today. We absolutely are involved with trying to determine where our play is in that marketplace.
Okay, great. I really appreciate it, and congratulations. I wish you guys luck moving forward.
Thank you.
Thank you, Natalie.
Thank you.
Thank you. Ladies and gentlemen, as a reminder, if you have a question, please press star then 1 key on your telephone. One moment for questions. At this time, there are no further questions. Please continue with any closing remarks.
We thank everybody for their interest in our company, and we look forward to presenting our third quarter results at the end of October. Thank you.
This concludes today's conference call. You may disconnect at this time, and thank you for your participation.