Melanie Caponigro - Director, Accounting Simon Nynens - Chairman and Chief Executive Officer Bill Botti - Executive Vice President Kevin Scull - Vice President, Finance and Chief Accounting Officer.

Jeff Geygan - Milwaukee Private Wealth Management Aaron Lehman - Shareholder Natalie Pasque - Shareholder.

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.

[Operator Instructions] 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 and 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 CEO, I will 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 30, 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 31, 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. And 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 $0.5 million 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 and we have a good pipeline of opportunities. Customer and vendor feedback confirms that we are on the right track. Our customer service is outstanding.

Now, I would like to hand it over to Bill Botti, 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 in the strategic accounts. The TechXtend segment had a higher percentage of GP compared to last year, but 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 expected – 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 the accelerating 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 and 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 and 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. Now, 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 31.

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 debt balance under the credit facility. Working capital at the end of the quarter was $32.4 million.

During the quarter, we have repurchased approximately 13,000 shares of our common stock. We still have authorization to buyback approximately 549,000 shares. Our stockholders’ equity now stands at $38.6 million.

At our July 29, 2015, Board of Directors meeting, the Board declared a dividend of $0.17 per share for its common stock payable August 17 to shareholders of record on August 10. 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 will turn it back to you..

Thank you, Kevin. Operator, we can now start with the Q&A session..

Thank you. [Operator Instructions] And our first question comes from the line of Sam Schaefer [ph]. Your line is now open..

Good morning gentlemen. Thank you for taking my call. This is actually Jeff Geygan. And kudos to you for driving that top line, it’s been very impressive to watch over the last 4 years, 5 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?.

Yes. So there is a – 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 are really exploring, expanding our offerings into several different markets. And I will let Bill Botti expand to it and I will come back to it after Bill’s comments.

Bill?.

Yes. Thank you, Simon. Hello Jeff. I think one of the keys is we have 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 business, where he ran the virtualization segment.

We have our roots in virtualization, as you may recall. And so we are looking at ways to expand that 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 are 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.

So those are adjacent markets to what we have been doing. And again, will provide new revenue streams. So Brian has to validate it, but very solid list. We have some that we are trying to get into the boat, if you will this quarter.

But many of those vendors, we have also had formed and have already formed and contracted on the TechXtend side, again to expand that solution portfolio along with service itself, that’s the direction.

And 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, no. I am good..

Great. Thank you.

Then Bill, it sounds like your Mesa, Arizona office went live in July, is that right?.

Yes..

Okay.

So as we look forward, what kind of impact should we expect as a result of having a presence in the Arizona serving Mountain and West Coast?.

Bill Botti:.

at our 0624:.

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 and I think that’s intuitive enough.

But 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 insight 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. And one of the reasons we invested in this earlier is to build those relationships, so that as we add products and services, we have willing audience to our proposition in how to do that. And so 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.

So it will be a joint call, they do account mapping, they build relationships with their strategic vendor partners so that we were able to be the go-to distributor when that person has any ability to select who they are 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, in terms of the margin. That doesn’t necessarily have to impact the margin. There are some large arrangements. And if we lead with a small, specialized product, they could say, you know what, I will buy the larger line from you. I am making this up, a security product that carries typical lower margins from you as well.

But what we try to do is be that – be more of that solution focused distributor who can also take these other products from you. So we are trying to expand into that sector..

Great to know.

And Kevin, it looks like your AP declined by about $10 million – $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..

Yes. But it’s also end of year business versus second quarter business..

Got it. And Simon in conclusion I think as I have talked to other investors about your company, you guys do an awful lot of things really well. So, I congratulate you on that, but there is some concern about margin and where that ultimately goes.

Can you provide any kind of sense of where the bottom line, either operating or net margin on the business might be at some point in the future?.

Yes. So, if you look at our margins since 2014, it’s 7.7%. And I am talking quarters here, first quarter, 7.7%; second quarter ‘14, 7.3%; third quarter, 6.8%; fourth quarter, 7.4%, this year, first quarter, 6.9%; second quarter, 7.0%. I really – again, we have really tried to drive that operating income on the long-term.

Now, we said we are going to invest in Q3 last year, so the good thing is we are adding selling costs. We just have to make sure that the investment in selling cost somehow keeps track – also keeps trend with the gross margin that we generate. We are trying to build a model that is profitable than net income percentage and drive that ultimate number.

I think – we fell in that trap before years ago, when we said, we don’t do low margin, high margin lines. And I think that it has hurt our business. So, 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.

If we do get an opportunity for – and by the way, the professional services that we are adding should also have an effect on those gross profit margins, but 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, so....

Alright, I appreciate it.

I am sorry, do you have other comments?.

Well, I know it’s not a clear-cut answer is like it should be around 7% or 7% or around 8%, but I just hope that everyone understands that, ultimately, we drive the overall growth of the company and we drive the return to investors and that’s a mix of how efficient can we take this as in 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. And our next question comes from the line of Aaron Lehman..

Hi, it’s Aaron Lehman, a longtime shareholder and happy at that, but somewhat unhappy to think that here is a company that has been around for quite a while muddling through and in some cases really growing significantly, but the story is totally silent to the investment community.

Are there any plans that will give you more exposure to investors, in general, so that we can see a greater appreciation going forward?.

Yes. So, first of all, a word about our stock performance compared to our larger competitors. If you track our stock and then you Google Finance or anybody, Yahoo! or any of those stocks, someone is going to do that for you. You can see that we actually fared quite well without that lack of Investor Relations as you said.

We have looked at that paid research no longer pays off. We do reach out and 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 as shown in our share price by the way this year has gone up significantly.

I don’t think we are meddling, I think our share price increased significantly this year and it should have increased significantly as our performance, as I think been stellar, especially considering the fact of the overall IT environment and the overall draw distributors, the growth that they are showing versus the growth that we are showing.

So, I am actually quite happy with the result so far and we are here for the long-term and I hope this trend will continue..

Hey, thank you..

You are welcome..

Thank you. [Operator Instructions] Our next question comes from the line of Natalie Pasque. Your line is now open..

Hi, good morning everyone. Thank you for taking my calls..

You are welcome. Good morning..

Okay. So, I just wanted to ask a couple of questions about your service, if you are 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 had expectations and the growth with other vendors in offering these kind of tailored products for these vendors?.

Yes. So, we can talk sector-specific, but we do not discuss publisher individual performance as I am sure you understand that’s private information to them. But Bill can definitely give you a color in terms of the overall virtualization and security environment.

Bill?.

Yes. Thank you, Simon. Good morning, Natalie.

What we are building is a value proposition around the services and while we have 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.

So, when they sell a product line, they generally don’t sell services.

So, if we offer them a way to make significant margin while we retain significant margin and add a remote installation for a health check type of service, then they can be taught how to basically add price with a hamburger, right? Add this to every quote, get your end user to bake in the discussion.

And 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 work.

They’re very successful at it and took their services in a different direction, and we believe there is still a larger 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 what you are feeling right now about that as a threat and how you’re combating it, essentially?.

I am sorry I couldn’t hear the question clearly.

Could you restate it?.

I am sorry about that.

So, just how are – if you could talk a little bit about how the company plans on providing value with this threat of electronic cloud distribution networks with vendors giving these products over the Internet? How you are viewing that because there’s opportunity there, but there is also a threat? So if you could just expand a little bit on that..

Sure. There is 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 product 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 the cloud, on storage or combined hosting and storage, etcetera.

And we work with many MSPs today delivering those subscription licenses and doing the billing for the vendor to this group of resellers with detailed information about their end users so they can consolidate billing. So, we are kind of evolving into that. We are going to continue to watch it.

In the distribution space today, there is not very many people who have overcome their investments yet, right? And it’s 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.

So we absolutely are involved with trying to determine where our play is in that marketplace..

Okay, great. I really appreciate and congratulations and wish you guys like moving forward to..

Thank you, Natalie..

Thank you..

Thank you. [Operator Instructions] 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..