Good morning, everyone, and thank you for participating in today's conference call to discuss Climb Global Solutions financial results for the first quarter and in March 31st, 2023. Joining us today are Climb CEO Mr. Dale Foster, the company's CFO, Mr. Drew Clark and the company's Investor Relations Advisor, Mr. Sean Mansouri with Elevate IR. By now, everyone should have access to the first quarter 2023 earnings press release, which was issued yesterday afternoon at approximately 4:05 P.M. Eastern Time. The release is available in the investor relations section of Climb Global Solutions website at www.climbglobalsolutions.com. This call will also be available for webcast replay on the company's website. Following management's remarks, we'll open the call for your questions. I'll now turn the call over to Mr. Mansouri with introductory comments.
Thank you, Amy. Before I introduce Dale, I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any forward-looking statements, which are being made only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements.
Our presentation also includes certain non-GAAP financial measures, including adjusted gross billings, adjusted EBITDA, and effective margin as supplemental measures of performance of our business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts and other important information in the earnings press release in Form 8-K we furnished to the SEC yesterday. I'll now turn the call over to Climb CEO, Dale Foster.
Thank you Sean and Good morning, everyone. As you can see, our momentum from 2022's record year has carried into our first quarter with significant growth in all of our key financial metrics. Our performance was driven by continuing to execute on our core initiatives, generating organic growth with existing vendors while adding new vendors to our line card. In addition, we continue to drive growth and margin expansion from our integration of Spinnakar, which we acquired last August of last year. Excluding Spinnakar, we generated double-digit growth on both the top and bottom line, demonstrating the strength of our core business as we continue to scale our line card in the U.S. and abroad.
Out of the 18 vendors that we evaluated throughout the quarter, we signed agreements with only four of them, demonstrating our commitment to a limited line card that is focused on the most innovative technology brands in the market. I'd like to highlight one of the latest partnerships that we launched in Q1 in North America. We partnered with LogicGate, a vendor that was first part of the Spinnakar portfolio of vendors. They are a leading provider of transformative risk and compliance solutions delivered on their Risk Cloud platform. We look forward to growing our relationship with LogicGate as we continue to scale our business globally. As many of you are aware M&A will continue to be an important component of our growth strategy as we continue to evaluate potential targets that would extend our geographic reach as strategic vendors, as well as enhance our Climb team.
We began this initiative in 2020 with the acquisition of Interwork Technologies, a Toronto-based value-added specialty distributor followed by the acquisition of CDF Group, a UK cloud software IT distributor and service provider. As I mentioned earlier, last August, we completed the acquisition of Spinnakar, another UK-based IT channel distributor focused in the EMEA rregion. These accretive transactions have not only extended our geographic reach beyond the United States but have also enabled us to reap the benefit of cross-selling opportunities between each entity in each region. This is further reflected in our recent entry into the French market with Spinnakar's relationship with VAST Data. We expect additional cross-selling opportunities as we expand our reach across new regions.
Quickly commenting on the macro environment, we do see a potential slow of IT spend across our regions, mainly in hardware sales, which could have a downstream effect on software sales. For example, less investments in hardware such as laptops, computers, and servers could lead to a reduction in various endpoint solutions. With the recent announcements of both large vendors and customers rightsizing their businesses, we will be paying close attention to where we can maintain our growth while being adaptive and agile to the needs of our customers. We believe the core segments of the market where we focus, which includes emerging technology companies operating in cybersecurity, storage, HCI, data management, network connectivity and cloud, are somewhat insulated from the broader issues impacting other verticals, as these are key areas of investment for most companies.
Looking toward the remainder of 2023, we expect to continue to drive organic growth and further improve our operating leverage as we scale our business. With a strong balance sheet and pipeline of M&A targets, we continue to be selective as we pursue acquisitions that will not only be accretive to our business, but will align with our culture and strategic goals. We have set the tone for 2023 with a strong first quarter and look forward to delivering another year of exceptional growth and profitability. With that I will turn the call over to our CFO Drew Clark, and he will take you through the financial results. Drew?
Thank you Dale, and good morning, everyone. Dale gets the exciting content, and I get the boring. As we discuss our first quarter financial results, I'd like to remind everyone that all comparisons and variance commentary refer to the prior year quarter unless otherwise specified. Let's get started. Q1 results marked our eighth consecutive quarter of double-digit profitability improvement. A little qualifier, Dale likes to remind me that I was only here for seven of those. As reported in our earnings press release, adjusted gross billings, which is a non-GAAP measure, increased 29% to $306.7 million, compared to $238.7 million in the year-ago quarter. The increase was driven by organic growth from new and existing vendors, as well as a contribution from our acquisition of Spinnakar which closed in August of last year.
In addition, net sales in the first quarter of 2023 increased 19% to $85 million, compared to $71.3 million, which reflects double-digit organic growth from new and existing vendors, as well as a contribution from Spinnaker, offset by a slight reduction due to the impact of FX. Gross profit in the first quarter increased 27% to $15.2 million, compared to $12.0 million. The increase was primarily attributable to 20% growth from new vendors and our existing top 20 vendors in both North America and Europe, as well as a contribution from Spinnaker, less the FX impact of our international business.
Gross profit as a percentage of adjusted gross billings remained flat at 5.0%, and as a percentage of net sales increased 110 basis points to 17.9%, compared to 16.8% in the prior year quarter. SG&A expenses in the first quarter were $10.3 million, compared to $8.2 million for the same period in 2022. SG&A as a percentage of adjusted gross billings decreased to 3.3%, compared to 3.5%. Net income in the first quarter of 2023 increased 23% to $3.3 million or $0.74 per diluted share, compared to $2.7 million or $0.61 per diluted share for the comparable period in 2022.
Adjusted EBITDA in the first quarter increased 33% to $5.7 million, compared to $4.2 million in the prior year period. This increase was driven by organic growth from both new and existing vendors, as well as a contribution from Spinnaker. Adjusted EBITDA as a percentage of gross profit or effective margin increased 170 basis points to 37.2%, compared to 35.5% in the year ago period as we continue to see operating leverage in our business. Turning to our balance sheet, cash and cash equivalents were $61.7 million on March 31, 2023, compared to $20.2 million on December 31, 2022, while working capital increased by $3 million during this period. The increase in cash was primarily attributed to the timing of receivable collections and payables.
We expect cash and cash equivalents to return to normalized levels moving forward. As of March 31st, 2023, we had $1.7 million of outstanding debt from the term loan that closed in April of 2022, for which the proceeds were used to fund certain capital expenditures. We had no borrowings outstanding under either our GBP 20 million or GBP 8 million sterling credit facilities. Subsequent to quarter end and consistent with prior quarters, our board of directors on May 2nd, 2023, declared a quarterly dividend of $0.17 per share of our common stock payable on May 19th, 2023, to shareholders of record on May 15th, 2023. As I mentioned in our last conference call, I'd like to reiterate the recurring nature of our business. As an IT distribution and solutions company, we do not generate recurring revenue in the traditional sense of a SaaS model.
However we do generate recurring revenue as we continue to average roughly 85% of renewal rates with our customers every year. While the macro environment remains uncertain, we have not experienced any impact to our renewals up to this point and continue to carry this expectation moving forward. Looking ahead, our strong liquidity position continues to provide us with the flexibility to execute on both organic and inorganic growth initiatives while our scale enables us to expand our relationships with vendor networks and customers across the globe. Regarding our M&A efforts, as Dale referred to them, we will continue to evaluate targets that we can enhance our geographic footprint in addition to our service and solution offerings. We look forward to delivering yet another year of growth and profitability in the year ahead. This concludes our prepared remarks.
We'll now open it up for questions from those participating in the call. Operator, back to you and thank you.
As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Vincent Colicchio with Barrington Research. Your line is open.
Yes. Good morning gentlemen. Nice quarter. In terms of the, your commentary related to the economy, you know, you had mentioned no issues with renewals as of yet. Curious if there's any signs of economic impact such as, you know, pushbacks on pricing, any changes in sales cycles or if any of your vendor categories are slowing a bit, any of that would be any response to that would be helpful?
Yeah. Thanks, Vince. You know, some of the comments come from, you know, we had our Partner Advisory Council last week, you know. We have big customers, small customers, we have all of our top 20 vendors. Just, you know, it's noise in the marketplace. Like I said in the commentary, there's rightsizing in some of these companies, both on the vendor side and the customer side.
You know, maybe a little softness on that, on that piece of it. Like I said, we feel pretty insulated because software, you know, so we don't have to deal with the logistics side of things. Just the product mix that we sell, you know, people, I think Drew mentions it often that people are not going to not have protection under the network or the security, whether it's endpoint, whether it's firewall. A lot of that software that we cover across our whole portfolio is pretty critical to the infrastructure. We're just gonna keep an eye on it and that's why we kinda mentioned it, that we do see some stuff out there in the broader market.
Are security and data management your fastest, growing categories? I assume you expect that to continue if it is.
Yeah. They are the fastest. I mean they're also very large, right? When you look at the security piece of it and what we sell, we're, you know, cybersecurity is just a big collect all for either, you know, security for endpoint, security for your data, you know, to protect from ransomware, and one of the fastest-growing markets out there, and the same thing in the data center space. We cover both. We do a lot of data movement, data management products when people wanna get into the cloud, and then they realize, you know what? I don't wanna have all my critical into the cloud.
I want a hybrid setup, so they'll have some on prem as well, or they'll do a shared local data center with another company or companies. So those are definitely the two fastest. We still, you know, have just great hooks into the DevOps space, and that's why you'll see more and more products that we sign there, and that's just unique. I think the margins potentially are better in certain areas. And we'll just continue to look. I mean, we have six categories that we self-define, that we sell into. That doesn't limit us to say we can't... You know what? Hey, there's another group of products that fit with us that are adjacent that we might add as another part of our portfolio.
Drew, you had a nice year-over-year improvement in adjusted EBITDA margins. Assuming your sales momentum continues, can we expect similar year-over-year improvements going forward?
Vince, we don't - as you know, we don't provide quarterly guidance, but I would say that we're cautiously optimistic that the trend that we've had, sequential year-over-year improvement will continue. To Dale's point, we have a high renewal rate. People are not going to discontinue renewing, security applications that protect endpoints all the way back into the data center. Will that slow down? Potentially. We're again, cautiously optimistic, confident that we'll continue to have the growth that we've experienced, over the last several quarters.
In terms of the acquisition market, Dale, have valuations improved? You know, if we see the economy weaken here, do you think it may make you a bit more cautious, or do you think you'll take advantage of, you know, better pricing?
You know, we're opportunistic, so, you know, hopefully we take better, you know, pricing, you know, that's out in the market. You know, we have both for North America, I've mentioned before, and then, you know, it's really our target is Western Europe, but there's still some in the U.S. You know, we haven't seen a lot of change there. I think people are really focused on their internal businesses right now. Not that we haven't had the meetings, we haven't signed the NDAs. We have quite a few out there that we continue to scope out. Nothing really has changed there. Of course, you know, we'd be looking for a discount. You know, what are we actually getting in that, in that business? Is it really in the right space?
We're gonna do it very strategically as we've done in the past three.
Thanks for answering my questions.
Thanks Vince. Appreciate it.
One moment for our next question. Our next question comes from Howard Root, Individual Investor. Your line is open.
Thanks. Good morning, congrats, Dale and Drew. That's just simply outstanding quarter, this go around. Can you hear me okay?
Yeah. Howard, don't tell us we're boring. We know we're boring.
Well, Drew gets the award for the funniest CFO, but that's a very shallow pool. You know, it's not damning with same praise. Two questions I have today. One, kind of a housekeeping item, one bigger picture. The housekeeping is on the stock grant that you announced, or that the company announced to you, Dale, a week or two ago, the 35,000 shares. My question is not on the amount because I don't consider that to be disproportionate at all, but it's on the idea of the immediate vesting, where as I see it, I think it's about a $1.3 million SG&A expense that's gonna all hit in Q2.
Without the vesting, it's kind of a one-time grant. It doesn't have the golden handcuffs, you know, vesting over the next three or four years to keep you where we need you, which is in the CEO role there at Climb. Can you give - I know it wasn't your decision 'cause you're the recipient of it, but can you give, you know, relay the board's why that happened, how that happened, and is this a one-off deal, or is this part of the compensation package? It's just very unusual in my experience.
Yeah. I'll - and Drew can chime in as well. It's more of a one-off deal, and it's really a timing issue, Howard, that this, you know, a couple things. You know, let me just go back, five years ago when the company had an entire different slate of board members. We've done a lot of things really on the governance side. We've, you know, created committees that weren't created before. We've done a lot of things from changing out audit firms, lawyers, you name it. You know, one of the things that we lacked and we took care of in 2022 was a compensation committee. We brought on a consultant to help us through that process.
It was really a timing catch-up, piece of it, and, you know, it's not ideal, but we'll get through it. You know, you won't see something like that again. It'll be more into, you know, just the regular flow, and we'll share a lot of that stuff as we go forward.
Howard, I would augment Dale's commentary with, you know, a couple of things that the board did concurrently. As Dale referenced, we, the board, through the compensation committee, engaged an external compensation consulting firm that was very helpful to the comp committee and the board. Worked hand-in-hand with the management team to create a new compensation program that is really salary bonus, long-term incentive plan that changes some of the metrics we have today and some of the timing. There's a three-year cliff vest that's going to be put into place with our LTIP program. We also engaged legal counsel to help harmonize the named executive officer compensation agreements.
We pulled this all together and without getting into too much detail, there were some adjustments made to Dale's employment agreement, where he gave some things back to the company. In connection with that, plus rewarding him for the historical performance that I think all the shareholders would absolutely applaud if you had bought, you know, bought when Dale joined and you look at the stock price today, you should be extremely satisfied with the performance of the company under Dale's leadership. There was a number of factors that went into that one-time grant, but as Dale mentioned, it's not something that would occur again. We believe with our executive employment plans in place, there are plenty of handcuffs and incentives for us to stay here and drive value for the next 5-plus years.
Right. Just to follow up on that. Am I correct, Drew, and it's about a $1.3 million expense that'll hit in Q2 on that one grant?
Correct. There will be an operating expense that'll flow through the income statement. From my perspective, yeah, it's gonna be an EPS reduction, obviously. If you look at it, you know, adjusted EBITDA for us, we always add back share-based compensation, and that's not gonna be recurring. To your point, could we have done some type of, you know, multi-year vesting? Yeah possibly, but we just felt that this was the right solution from the compensation committee and the board, and Dale was, I think, satisfied with the end result.
Okay. The bigger picture and much bigger picture, I mean a year ago, we were, you know, applauding you guys crossing $1 billion in adjusted gross billings, and now you're annualizing at, you know, $1.2 billion, 20% growth. You know, as I was told, trees don't grow to the sky. Yeah, I don't have an appreciation for where you are in kind of reaching your market potential. I mean, at $1.2 billion sounds like a big number, but you're playing in a huge, huge industry.
If you take your slice of that and just in general terms, not asking for specific guidance, but are you in the early innings, the middle innings, the later innings excluding acquisitions, just organic growth with your approach and adding these four really, you know, focused new product offerings, say, every quarter, is it something that you can continue with this 20% growth and not reach the upper end of your market? Or Is that is too much to ask over the next couple of years?
Yeah Howard, here's my take, and that is if you look at the three competitors that we talk about, you know, the smallest one being about $40 billion in sales, the gap between where they play and where we are is big. We could double in size without anybody even knowing who we are other than, you know, the companies that are coming out of startup phase looking for a market. You know, I never tell manufacturers and vendors that we sign, I never wanna tell them how to go to market, but if they choose to go the routes that we actually can get their products into very quickly, then we're all in with them. Once they pick that route, then we'll start, you know, putting our resources toward that.
Yeah, can we double and triple in size? I see that. You know what I mean? If - if we look at the next, you know, five years, I don't see any obstacles. You know, there's that many vendors coming out. I just can't tell you how many calls my vendor alliance team does per week on a new vendor that we've never heard of before. It used to be in the early days, you know, 5 years ago, My team loves to say it, we were desperate, so we were gonna sign anybody that could talk in the mirror and say, "Hey, we just need to really build out our line card." Now we have them coming toward us. I think some of it's some of the branding that we're doing that we're getting seen.
Some of it's just word of mouth by vendors. I mentioned our PAX summit last week. It couldn't have gone better. What we also believe is that, you know, there's 1,000 people in the IT markets that we service in the vendor side, and they continually jump jobs. We follow the jockeys. You know, this person's running VP of channels at one company, 2 years later, there's another one and they're like, "Hey, I wanna work with the Climb team. This is what they did for me and I wanna onboard them." We're getting first looks instead of second looks. First looks would be, you know, the big disties, and now we're getting those first looks instead of saying, "Hey, let's find them as well as a boutique.
Yeah. I'm sorry, Howard. I'd add that we've included in our investor presentation deck that's available on the corporate website, some total addressable market indicators. If you look at the TAM for the space that we operate in, it's, you know, $20 billion roughly. We're doing $1.2 billion. You can extrapolate with if we get share shift, new products, as Dale's referenced, and we continue to grow and do a great job for our vendor partners, yeah, can we double and triple the size of the top line over the next five years? We're confident we can.
Great. Very helpful. Yeah, I did buy when Dale came in and I am very happy. Thanks for the performance. Keep up the great work.
Thanks, Howard.
I'm showing no further questions at this time. I would now like to turn the conference back to Dale Foster for closing remarks.
Thank you operator, and thank you to all of our shareholders and team members that make up our Climb family and dedicated to our growth and performance. Look forward to giving an update after Q2. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.