Good morning, everyone, and thank you for participating in today's conference call to discuss Climb Global Solutions financial results for the third quarter ended September 30, 2023. Joining us today are Climb's CEO, Mr. Dale Foster; the company's CFO, Mr. Drew Clark; and the company's Investor Relations adviser, Mr. Sean Mansouri, with Elevate IR. .

By now, everyone should have access to the third 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.climbgobalsolutions.com.

This call will also be available for webcast replay on the company's website. Following management remarks, we'll open up the call for your questions. .

I'd now like to turn the call over to Mr. Mansouri for introductory comments. .

Thank you. 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, adjusted net income and EPS as well as 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 and Form 8-K we furnished to the SEC yesterday. .

I'll now turn the call over to Climb's CEO, Dale Foster. .

Thank you, Sean. And good morning, everyone. We made steady progress on our core initiatives during the quarter as reflected by another period of organic growth and profitability alongside our recent acquisition of DataSolutions. At a high level, this acquisition enables us to deepen our line card and efficiently grow market share in Europe.

I'd like to publicly welcome the DataSolutions team to the Climb family and look forward to working with the new team in the months ahead. .

As we previously mentioned, our commitment is to have a focused vendor line card by selecting the most innovative technology companies in the market. Out of our 29 brands that we evaluated in the third quarter, we signed agreements with only 3 of them. I'd like to quickly highlight a couple of these wins. .

First, we partnered with GigaIO, a pioneer in artificial intelligence and high-performance data center solutions. This collaboration represents another step forward in our data center product line and will enable us to deliver additional cutting-edge solutions to the channel to optimize data center operations. .

Next, we kicked off a relationship with Security Compass, a leading provider of security -- cybersecurity solutions that integrates directly with existing DevSecOps tools and workflows, allowing organizations to release secure and compliant software to the market quickly and cost effectively.

We are excited to collaborate with each of these vendors and bring their products to market, building a mutually beneficial relationship along the way. .

In early October, we closed the acquisition of DataSolutions headquartered in Dublin, Ireland, a leading security distributor of -- specialty distributor of cloud and security solutions with sales in both Ireland and the U.K.

DataSolutions brings a deep network of relationships to Climb, including 14 focused vendor partnerships such as Check Point, Citrix, Neustar to name a few. In addition to their strong vendor relationships, DataSolutions carries a robust recurring revenue base with more than 90% of their fiscal 2023 revenue coming from existing partners.

We expect this acquisition to be immediately accretive to earnings and adjusted EBITDA. We've already identified cross-selling opportunities and look forward to unlocking additional potential as we integrate DataSolutions into the Climb operating systems in the months ahead. .

Shortly after the acquisition of DataSolutions, we announced our technical services division, known as Cloud Know How, completed a rebrand to Climb Global Services. This rebranding signifies our commitment to unifying our operating divisions under one uniform brand to build a truly global platform.

Currently, our service team delivers migration, modernization, management and services for MSPs, resellers and their respective end user clients on platforms such as Microsoft Azure, ManageEngine and Acronis.

We're excited about the continued expanding of our professional services arm to provide more comprehensive solutions and support to our growing customer base across the globe. .

Quickly touching on the macro environment. Despite broader challenges and global uncertainty, our vendor and acquisition pipelines remain strong, and customer sentiment for the next year continues to be positive.

We continue to monitor our evolving economic landscape and the potential softening in the markets we serve, particularly where large competitors have experienced softness in the hardware sector. However, we believe we are still well positioned to drive value and growth to our customers and vendors in the future as we scale our global footprint.

As I've mentioned before, our team is always focused on the long game. .

Looking ahead, we will remain diligent in our M&A strategy as we evaluate opportunities that can bolster our line card and are immediately accretive to our financial profile, both in North America and overseas.

With a strong balance sheet and a robust pipeline of targets, we can be selective as we pursue acquisitions that will further add scale to our business as we align with our culture and strategic goals. .

With that, I will turn the call over to our CFO, Drew Clark, who will take you through the financial results. Thank you.

Drew?.

Thank you, Dale. And good morning, everyone. As we review our third quarter financial results, I would like to remind everyone that all comparisons and variance commentary refer to the prior year quarter unless otherwise specified. So jumping right in. .

As reported in our earnings press release, adjusted gross billings, or AGB, which is a non-GAAP measure, increased 7% to $281.9 million compared to $264.3 million in the year ago quarter.

In addition, net sales in the third quarter of 2023 increased approximately 3% to $78.5 million compared to $76.3 million, which primarily reflects the organic growth from our new and existing vendors. .

As we have communicated before, we focus on AGB as the true metric of our top line growth as the calculation of net sales is influenced by product mix and the respective adjustment to convert AGB to net sales for financial reporting purposes under GAAP.

In the third quarter, we had an increase in the sale of security, maintenance and cloud products, which are recorded net of related cost of sales, and therefore leads to a larger adjustment from AGB to net sales. .

Gross profit in the third quarter increased 6% to $14.3 million compared to $13.5 million. Again, the increase was primarily driven by organic growth from new vendors in our existing top 20 vendors in North America and Europe.

This growth was partly offset by several large customers taking advantage of early pay discounts, or EP, compared to the year ago period. For example, in the month of September, we had approximately $500,000 more in EP taken as compared to the prior year.

Even with increased levels of EP, gross profit as a percentage of adjusted gross billings remained consistent at 5.1% and as a percentage of net sales increased to 18.2% compared to 17.7% in the year ago quarter..

SG&A expenses in the third quarter were $10.1 million compared to $8.9 million for the same period in 2022. As we previously stated in other earnings calls, the increase was primarily attributable to investments in our infrastructure to drive future growth. So SG&A as a percentage of ABG was 3.6% compared to 3.4% in the year ago period.

As we've committed to before, we expect SG&A as a percentage of AGB to decline in 2024 as we continue to scale our global operations and drive operating leverage..

Net income in the third quarter of 2023 increased 6% to $2.4 million or $0.52 per diluted share compared to $2.2 million or $0.50 per diluted share for the comparable period in 2022.

As mentioned in our press release, earnings per diluted share in the third quarter of 2023 were negatively impacted by $0.02 for foreign exchange and $0.06 in fees associated with the acquisition of DataSolutions and approximately $0.19 per share in EP taken by customers compared to the prior year. .

Adjusted EBITDA in the third quarter increased 2% to $5.1 million compared to $4.9 million. The increase was primarily driven by the aforementioned organic growth and partly offset by investments in our infrastructure and costs associated with the acquisition of DataSolutions.

Adjusted EBITDA as a percentage of gross profit, or effective margin, was 34.5% (sic) [ 35.5% ] compared to 36.6% in the year-ago period. Our effective margin and drop-through were impacted by the increase in customer early pay discounts, as referenced previously..

Turning to our balance sheet. Cash and cash equivalents were $49.8 million on September 30, 2023, compared to $20.2 million on December 31, 2022, while working capital increased by $5.2 million during this period. The increase in cash was primarily attributed to the timing of receivable collections and vendor payments.

The benefit of increased EP is the timely collection of our receivables, which has maintained our DSO metric in the U.S. below 32 days. As of September 30, 2023, we had $1.4 million of outstanding debt with no borrowings outstanding under our $50 million revolving credit facility with JPMorgan Chase. .

Subsequent to quarter end and consistent with prior quarters, our Board of Directors declared on October 31, 2023, a quarterly dividend of $0.17 per share of our common stock payable on November 17, 2023, to shareholders of record as of November 13, 2023. .

Looking ahead, we will continue to leverage our strong liquidity position to explore acquisition opportunities in both domestic and international markets. This will enable us to expand our service and solution offerings, reach new customers and accelerate our expansion into new markets.

We look forward to closing out the fourth quarter on a strong note and continuing to execute our game plan in 2024 and beyond. .

This now concludes our prepared remarks. We will now open it up for questions from those participating in the call. Operator, back to you. .

[Operator Instructions] Our first question comes from Vince Colicchio with Barrington Research. .

Yes. I just want to call out that I couldn't hear Drew's comments very well until he started talking about the balance sheet. Having said that, Dale, curious if any vendor categories slowed in the quarter versus your expectations and how the overall business is trending in October. .

Yes. Just looking at the Q, I mean, we had -- we looked at -- we had some pockets. Typically, the government fiscal year ends September 30. And we had a tough comparable from the year before. But we just have some -- a couple of pockets that were soft, but they were by territories and not really by product categories. .

So 2 things we kind of measure, Vince, and that is what does our quote volume look like because we can track over the years what the quote to order turn into. We had some of it pushed into Q4.

I can just tell you, Q4 looks good from some of the vendors that we've signed and the ones we're going -- besides the DataSolutions that we're integrating those teams, both -- mostly on a sales and marketing standpoint. .

But we haven't noticed them. We are looking at the amount of pipeline. Like I think it's one of our biggest quarters of evaluating new vendors that are coming at us at 29. It's a big number and signing 3 of them. We still have 3 in the pipe that we're not able to launch yet just due to timing of that many vendors coming at us. .

And I think the last thing I'll mention is we talked about signing some of these vendors and trying to keep a limited line card. What we don't really talk about publicly is that we push vendors that are nonperforming or performing at more of a flat level. They go to our division called Climb Elevate.

And they get transacted, but they don't get access to our sales and marketing teams like a vendor in our core portfolio. So we still transact when they're ready to really put money into the market or hire team members that are going to cover territories. Then we can bring them back into the fold.

But other than that, they stay into our Climb Elevate team. .

And did your top 20 vendors perform in line with the rest of the business?.

They did across the board. Those are the ones that are driving that. And same with our customers. We had some of our larger customers a little flat in the quarter as well. And we had some stuff on our Spinnakar side we can talk about that got pushed into Q4 that we already have those orders in and just didn't give them in the last week of September. .

And then on DataSolutions, any help on what type of revenue contribution you expect in Q4 and maybe '24?.

Drew?.

Yes. At this point, we're not going to share that information, Vince. But we'll try and provide some info as we get into the Q4 earnings call. .

Okay. And then -- so the organic growth for the quarter, I assume very little came from your Spinnakar acquisition.

Is that correct?.

Correct, yes. The Spinnakar contributed very little in the prior year quarter. We acquired them in August and did not have a big -- had a very minor contribution in this quarter. .

Our next question comes from [ Howard Rue ], an Individual Investor. .

Congratulations on another solid quarter.

Can you hear me okay?.

Sure can. Thanks, [ Howard ]. .

Sure. If I could ask just a couple of questions on the DataSolutions acquisition just to get a little bit more kind of detail on the numbers. So as I see it, you paid around a little over $16 million for it, and then there's a post-closing earn-out.

And without giving the amount, is that like a 10% potential? Or is that more substantial of a potential earn-out amount for that acquisition?.

Yes, the earn-out has a range, [ Howard ]. That would be 85% to 115% of the EBITDA number. So it's going to be probably -- in terms of the consideration that we've disclosed in the filings, it's going to be about 15% to 20%. .

Okay. So -- and with EBITDA of $3.3 million in the fiscal year March 31 for that, you're paying around 5x EBITDA.

Is that kind of the way you look at acquisitions going forward? Is that a kind of normal pricing for you?.

We were fortunate to get a little bit of a discount on the EBITDA multiple. But as we said before, over in Europe, the transactions will probably have premium due to the fact that, as Dale likes to say, the Germans buy from the Germans, the French buy from the French.

So we would expect actually multiples to be slightly higher than that on a go-forward basis in Western Europe, but we thought it was a fair transaction for both the sellers and us. .

And [ Howard ], just to get a little more detail, so when we look at the acquisitions, we look at where, of course, we're trading at. And that's -- it's typical if it's in North America, and we know we might pay a little bit more. We also look at the concentration, if there's a discount because they have concentration in vendors and customers.

And then also, we look at the margin profile. There's a lot of things that go into it. This one came out from a company that was running the book on, and they were basically pushed out to multiple distributors that were looking at them as they're being attractive, not only for the Irish market, but for some of their vendors. .

And the one that jumps out of the page, it should jump out as almost a Tier 1 vendor with Citrix. And Citrix and Microsoft go very well, and that's one of the ones we have as a distributor in the U.K. that we want to bolster to go to the -- take multiple products to the same customer base.

And with our 2 companies combined, we can do that in an effective way and be efficient delivering those product categories. .

Okay. And then just kind of a final one on that. So can you give us kind of a perspective on their Q3, not looking forward but for DataSolutions Q3 as what the amount -- the adjusted gross billings or net revenue? I realized you didn't have any of that in for your number.

But if they've been added in, is that a $10 million increase in Q3? Is that a $5 million increase in Q3? And adjusted gross billings, if you had them in your fold for that quarter?.

Yes. So there's a little bit of cyclicality to their business. And if you looked at -- again, as we've said in Q4, [ Howard ], they will be accretive, obviously, at the top line. They'll be accretive in terms of EBITDA, and they'll be accretive for us in terms of an EPS calculation.

I don't have the exact numbers in front of me, and I wouldn't want to necessarily talk about those at the moment, but it's going to be a very, very good transaction for us ultimately. .

I think it's a fair number, [ Howard ], them being over $130 million in adjusted gross billings, not on net sales because we'll have to go throughout the netting process. But bringing around $10 million a month, but then they have some cyclicality. But they also have some -- the core business with some of their top vendors. .

And we talked about it in some of the early releases, that they start in the Irish market, very strong there. When we were presenting this to the Board for approval, you look at the vendors that they have and the percentage of market share and wallet that they have for the Irish side, is in the 90 percentile.

But -- and then they moved in the last 3.5 years to the U.K., and they are quickly gaining market share there. So where they go, they tend to be one of the leaders in that space of their product fix -- product mix. .

And do you see that having legs outside of the U.K.? Or is that kind of where it stops for... .

Of course, we take a look at their top 5 brands, and we take a look at their contracts and say, okay, can we expand this contract into the rest of Western Europe? They are selling -- and we found some really unique things in the company. And that is they already -- since they're an EU country, it's easy to ship into the other 28 EU states.

So it makes it easy for us after the Brexit happened. .

So that's a potential, and some of their contracts. But we've already looked and added them to some of our existing contracts for our vendors that we had in common. Like I think it was Cato and Orca. But yes, we'll look to do that.

If we were able to expand, and this is some of our first conversations, Citrix to other places, I think that would be a big one for us on top of just the team we acquired. .

Yes. [ Dare I say ] a huge win for you. So my second question generally is I'm looking at Q4, which last year, you just knocked the cover off the ball with your adjusted gross billings about $320 million, which is a big step-up, obviously, from Q3, and it's obviously seasonally your strongest quarter.

But you had words in the press release about broader challenges in the macro environment. And there's other issues, global uncertainty, that kind of thing.

But in terms of posting a number above that kind of with the DataSolutions maybe adding $30 million or so in adjusted gross billings, are you confident in exceeding last year's exceptionally strong number in Q4 for your adjusted gross billings?.

You're talking to a sales marketing guy. So yes, I'm very confident, [ Howard ], in what the team is performing. We already have October numbers, as Drew and his team put out a flash report. So we're on track. That's our goal to do that.

I don't see -- yes, there could be some obstacles as far as getting stuff in the last couple of days because a lot of -- everybody waits. And we just -- the vendors wait to push these things in.

Like I said, we track our quote volumes so we can know if there's going to be a dip coming in because we know how many quotes it takes to get one order depending on certain manufacturers. We track that data. But we -- I'm comfortable that we'll be on target for Q4. .

Great. Great. Well, congrats again on another solid quarter. I love the continued focus on performance and execution. .

Operator, can you hear us okay?.

Yes. You're coming clear on my side. I know a few people are working on the back end for some of our listeners. Our next question comes from Bill Dezellem with Tieton Capital Management. .

I'll just say, Drew, in relation to your last question, as you were answering the prior questioner's question, there was a lot of garble that came through and was not only difficult to decipher but like indecipherable on this side..

Relative to my question, the early pay discounts, I am surprised with higher interest rates that your customers are doing additional early pay discounts or more early pay discounts this year than they did last year.

So have you raised your incentive for the early pay discounts? Or what's the dynamic behind the scenes there, please?.

Sure.

Bill, can you hear me?.

Yes. .

Okay. So the dynamic is we have one of our large DMRs that historically was very inconsistent. They're not publicly traded or private, and they brought on a new CFO about 1.5 years ago, who's reorganizing his team. They're focused on a number of different initiatives.

And for whatever motivation, they are now adhering to the time frame in early pay discount. Don't have a real understanding as to why, but we just know that that's been a mandate from him to his team, to not forgo the early pay discount.

So I don't know, again, what their balance sheet or financing terms look like, but they're taking full advantage of it now. They were probably taking early pay maybe 30% to 40% of the time. It was very inconsistent. We didn't have any rhyme or reason, but they're now taking it. .

So in terms of -- assuming that, that behavior continues over the course of next 12 months, then we've -- we won't have the same increase, at least from them, in early pay discounts. And the comparables will be a bit more even.

Is that kind of how you are looking at it?.

Correct. And as we've stated, we were very positive on the fact that we were able to maintain gross profit as a percentage of adjusted gross billings at a consistent level despite the increased level of early pay taken by a couple of our key DMRs. .

Great. Congratulations getting money in the door early. .

[Operator Instructions] Our next question is from Bob Sales with LMK Capital Management. .

Two questions. And you really -- for my connection, you really broke up as you were walking through the dynamics of the quarter with respect to the end of the quarter in macro.

So my question is, can you just talk a little bit about the organic growth one more time and, just for those of us that didn't hear, what you saw and the dynamic, has it played out, and the resulting 7% growth in adjusted gross billings?.

So the dynamic, Bob, if you didn't hear it before, we had a nice mid-single-digit growth in adjusted gross billings despite "headwinds" that many of our larger distributors experienced over the past several quarters, predominantly due to hardware.

Our outlook remains, as Dale mentioned earlier, fairly confident in the fact that we'll kind of meet and be at the previous quarter -- fourth quarter results from 2022, at least at the top line. Obviously, gross profit is going to be impacted by what we expect the continued early pay discount taken by several DMRs. .

And again, we're confident that we can continue to execute and deliver on the long term. Will we have some economic headwinds maybe that get into the data center security space and trickle down from hardware? We're not seeing a lot of that, but we're starting to see a little bit, right, slowly but surely.

Some opportunities are getting pushed to the next quarter, but we're still pretty bullish on the fact that we'll continue to execute the game plan that we've had over the past 10 quarters. .

And Bob, we track -- we have quite a few customers that we sell to that are public, and they've already put their earnings releases out, like CDW. They have a bigger hardware component. And some of the times, when we went through the last couple of years, the hardware piece of the data center and everybody moving to a remote play.

So there's a lot of sales on the hardware side of things. What we say is we're still 90% software. .

So we see a different product mix quarter-by-quarter depending on the ebb and flow. One thing that we always count on is that we're having so many different vendors coming at us from a security standpoint, and we already have a lot of vendors on our security portfolio. So that continues to be strong.

And everybody is doing security in a little different way. .

With the acquisition of DataSolutions, it comes with them a strong CTO that's going to help us really kick off a division that's going to really focus on AI products.

Most of our vendors are talking about already or already have some kind of machine learning built into their products, but then now they're starting in the marketing side to push that element or that potential in their products. So just a lot of good things in the software, IT security, data center space, and that's our 2 top categories. .

Great. And then my second question is on the DataSolutions acquisition. It looks like a home run in terms of accretion. I wanted to understand the tax situation given that it's an, I assume, Irish-domiciled company and whether that presents any of the advantages there because of the Irish standing. .

Yes. We look to -- we're looking at that right now, and we'll -- we did have an entity when we acquired CDF that had -- because they were getting ready for a potential Brexit 3 years ago. So we'll look at that. We'll look at where we can deal with the tax savings. The Irish tax on business is at 12.5%, I believe.

So yes, we're -- we'll continue to look at that, where orders actually start from where they get transacted and where we can take advantage of that and into the rest of the EU countries and then back to the U.K. team. .

Thank you. At this time, I'm showing no further questions. I would like to turn it back to Dale Foster for closing remarks. .

Thank you, operator. And thanks, everyone, for joining today. Again, I want to welcome our DataSolutions team. We've had the luxury of spending some time in Dublin over the last 6 months with the teams. Our teams are getting integrated. Some of our sales and marketing team were in the U.K.

over the last couple of days, getting things kicked off, and we'll really start talking as a combined team going into 2024. Thank you for your support, to the shareholders, and we look to have a strong 2023. Thank you. .

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect..