Climb Global Solutions, Inc. (CLMB) Earnings Call Transcript

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, 2026. Joining us today are Climb's CEO, Mr. Dale Foster; the company's CFO, Mr. Matthew Sullivan; and the company's Investor Relations adviser, Mr. Sean Mansouri with Elevate IR by now, everyone should have access to the third quarter 2026 earnings press release. Investor Relations of Climb Global our www.climbglobal.com. This call will also be available for webcast replay on the company's website. I would now like to turn the call over Sean Mansouri to discuss Climb Global Solutions.

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 and 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 key operational metrics and non-GAAP financial measures, including gross billings, adjusted EBITDA, adjusted net income and EPS 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. I'll now turn the call over to Climb CEO, Dale Foster.

Thanks, Sean, and good morning, everyone. Our team delivered an exceptional third quarter, achieving record results across our key financial metrics, demonstrating the strength and scalability of our global platform, our strong performance was driven by growing momentum across our vendor portfolio and deepening our relationships with our partners. Within our line card, we generated sequential growth with 19 of our top 20 vendors during the quarter. We are seeing meaningful traction with several of our newer relationships that have added or expanded over the past year. Underscoring our ability to identify innovative technology partners and develop into meaningful contributors over time. During the quarter, we evaluated 32 new net brands but signed an agreement with only 1 Harmon Security, reflecting on our disciplined approach to our vendor selections. Harmonic is an innovative cybersecurity company focused on helping organizations securely adopt and scale AI technologies. As AI adoption accelerates, we believe solutions like Harmonics will become increasingly important in helping business capture and product proactivity benefits of AI while mitigating the associated security risks. This partnership further strengthens our security portfolio and positions our resellers, partners to address a growing area of customer demand. As these partnerships in their channel reach, strengthen reseller engagement and accelerate growth. We refer to this segment of the market is called as Challenger vendors, which aligns with the challenger category within Gartner's Magic Quadrant framework. We believe this represents an attractive and underserved opportunity for Climb as these companies can benefit from the same high-touch sales, marketing and technical expertise that have helped us successfully scale our emerging vendor relationships. Importantly, this is a natural extension of our existing strategy rather than a shift away from our core focus. By leveraging our specialized teams established reseller network and proven go-to-market capabilities we believe that we are well positioned to attract a broader range of technology partners and further expand our growth opportunities. As we continue to expand our vendor portfolio and scale our global operations, we are equally focused on strengthening the infrastructure needed to support that growth. A key part of this effort is improving operational efficiency and leveraging technology to streamline processes across the business. Our ERP systems serve as critical components of our global operating infrastructure, and we continue to focus on leveraging its capabilities to automate workflows and drive greater efficiencies across the organization. We are applying this approach to areas such as coding various accounting functions, along with digital connectivity to our vendors and partners, where we see opportunities to reduce manual processes, improve productivity and support continued growth as we scale. Separately, we are investing in developing of our own cloud marketplace, which will provide a centralized platform for MSP and reseller partners to purchase, provision and manage cloud subscriptions. The platform is designed to simply to simplify transactions, consolidate billing and provide greater visibility across the customer life cycle. Over time, we see an opportunity to leverage this infrastructure across all of our global territories, enabling us to scale recurring cloud transactions, strengthen our partner relationships and expand on new markets more efficiently. Subsequent to quarter end, we expanded our European presence through the acquisition of Neogen, bolstering our position in France with a highly complementary team reseller network and vendor portfolio. The transaction builds on the investments we have made in Europe and creates additional opportunities to deepen vendor relationships while broadening the solutions available to our channel partners. Similar to our approach with Interwork, which continues to perform on plan since closing the acquisition earlier this year. We believe Climb infrastructure can support NUVED's growth while maintaining their local market expertise and customer relationships that have contributed to its success. We believe NeoVad is a strategic and cultural fit and an important part of the increasing of our scale across Europe operations -- European operations. Looking ahead, we will continue to identify cutting-edge technologies that can strengthen our line card and support organic growth. We will also selectively pursue acquisitions that fit our culture and operating model with Europe remaining as an important focus area. With the growing momentum we are seeing across our business, we believe we are well positioned to close out the year on a strong note and deliver another year of performance -- of record performance for Climb shareholders. With that, I will turn the call over to Matt Sullivan for financial results. Matt?

Thank you, Dale, and good morning, everyone. A quick reminder as we review the financial results for our third quarter all comparisons and variance commentary refer to the prior year quarter unless otherwise specified. As reported in our earnings press release, gross billings in the third quarter of 2026 increased 40% with a quarterly record of $706.4 million compared to $504.6 million in the year ago quarter. Distribution segment gross billings increased 41% and to $680.5 million, while Solutions segment gross billings increased 14% to $25.9 million. Net sales in the third quarter of 2026 increased 37% to a quarterly record of $220.3 million compared to $161.3 million in the prior year period. This increase reflects strong double-digit organic growth from new and existing vendors. Gross profit in the third quarter of 2026 increased 28% and to a quarterly record of $33 million compared to $25.7 million for the same period in 2025. The increase was driven by organic growth from new and existing vendors in both North America and Europe as well as the contribution from Interworks. Selling, general and administrative expenses in the third quarter of 2026 were $20.9 million compared to $16.2 million in the prior year period. The increase primarily reflects SG&A associated with Interwork and variable sales compensation attributed to the growth in organic gross profit. SG&A in Q3 of 2026 was also impacted by our investments in IT infrastructure and automation initiatives designed to improve operating efficiencies. SG&A as a percentage of gross billings decreased to 3% for the third quarter of 2026 compared to 3.2% for the prior year period. SG&A as a percentage of gross profit for the third quarter of 2026 was 63.2% and represents a decline from the first 2 quarters of 2026, which were 68.5% for the second quarter of 2026, and 76.7% for the first quarter of 2026. Net income in the third quarter of 2026 increased 69% to a quarterly record of $7.9 million or $0.43 per diluted share, compared to $4.7 million or $0.25 per diluted share for the prior year period. Adjusted net income increased 34% and to $8 million or $0.43 per diluted share compared to $6 million or $0.33 per diluted share for the year ago period. Adjusted EBITDA in the third quarter of 2026 increased 35% to $14.7 million compared to $10.9 million in the same period of 2025. Effective margin, which is defined as adjusted EBITDA as a percentage of gross profit increased 230 basis points to 44.6% compared to 42.3% for the same period of 2025. Turning to our balance sheet. Cash and cash equivalents were $66.9 million as of September 30, 2026, compared to $36.6 million on December 31, 2025. The increase in cash was primarily attributed to the timing of receivable collections and payables. As of September 30, 2026, we had no debt outstanding or outstanding borrowings under our $50 million revolving credit facility. We ended the quarter with a strong balance sheet, giving us the flexibility to support organic growth, invest in our operating infrastructure and pursue strategic acquisition opportunities. We remain disciplined in our approach to capital allocation, focusing on investments that align with our long-term strategy, drive earnings growth and create sustainable value for our shareholders. This concludes our prepared remarks. Operator, please open the line for questions.

Our first question is from Keith Housum with Northcoast Research.

Great job on the quarter. Guys, just a few questions on the Nelobadacquisition. I guess any differences in terms of their margin profile versus claims? Or is it pretty similar?

It is and Matt can give the details, but it's in line with a lot of our European acquisitions, right? So the margins are typically double what we see in North America, and this one is actually higher than that. And it really is attributed to how they actually work with their customer base, where they bring on vendor lines, negotiate a higher margin upfront as they're going to take a new vendor line into the French territory and then that will decrease over time as the resellers take on more of the burden, but those margins still stay in that double-digit range compared to where we've seen in the U.S. is single -- mid-single digit.

I was just going to say, like -- just to reiterate what Dale said, I mean it's consistent margins with what we've talked about with the Interwork acquisition. So it is slightly higher than our existing European business, but it is in those low double-digit gross profit percentages. .

Great. In terms of their historical growth rates, are they growing in line with you guys as well?

Go ahead, Matt.

In recent years, they've signed a couple strong vendor lines in France. So their growth has accelerated in the last 2 years even greater than the growth rates that we've seen historically.

And what's unique? I mean, we've been talking for a while. We've had one sales representative in France Camel and he was both selling in France, our product portfolio, but also prospecting for us. So it's the relationship that we built with the Jerome, the owner of Neovad. But the uniqueness of Neovatis that they have majority exclusive relationships with their vendors for France. And they also sell into other French-speaking countries. But really the focus in France and they get the higher margins because they have exclusivity. And then we -- like I said this in the past, how do you target potential acquisition targets? We use our vendor network, and we've done it in this case as well, just to check on and saying, okay, how is this distributor -- what's the go-to-market do you find out a lot about them before you even maybe have your first meeting with them, so it works out very well.

Great. I appreciate that. And is management going to be staying on?

Their full team will be staying on. They're just in a suburb of Paris. That's been out there for a while. I'll be heading back out for another trip in a couple of weeks. .

Great. Good to hear that. And if I just look at here at Quinn's results for the quarter, obviously, outstanding results. sales and billings growing faster than gross profits there. So was there a mix change versus prior quarters here or just kind of the lower profitable business? Or maybe just the mix of what you have there, can you give a little bit of color on that, please?

Yes. It goes back to Q2, when we had 18 of our top 20 brands growing at a really good clip, and now we have 19 of top20 brands. And I'll put it out there. I mean the 20th brand is Adobe. In Adobe, it's not that it's not growing. It's a little flat but it's still a great relationship with us, but that's our. So it's really the core piece of our vendors that are growing at this club to make it there. We didn't have any big one-offs that we've had in the past. So it's just -- like I said, just a really good quarter. Teams are firing on all cylinders. And like I mentioned in the prepared remarks, we're just so focused and I think they said this in Q1 this is going to be the year that we really get off and get our efficiencies going and putting it -- or putting quite a few dollars into our systems and our technical teams.

So there's nothing really onetime item in the quarter. It's all sustainable growth from here, correct?

It is. And we -- when we talk about our top 20 brands, we still have brands going in and out of our top 20, the ones that are growing faster, the ones are becoming large. We've just got some ones that we signed over a year to 2 years ago. I'll mention Dark Trace. They're on that $100 million run rate as a vendor. . And we're just seeing more than -- and as we said before, I mean, we're still getting a lot of inquiries for vendors for us to take a look at that are just much larger brands. and they come with a much larger share shift either from their direct model that they need to get more efficient or share shift from our competitors.

Great. And I guess last question for me, I'll turn it over. But in terms of your reseller count, do you guys -- I'm sure you guys track it, but you guys discuss it publicly in terms of how many resources you're working with and how it's growing over time?

We do. We do it in our investor deck -- and we talk worldwide, I think we give a range of 7,000 to 7,500 resellers that are unique customer of ours. But yes, we don't -- we track it because we're mining our database all the time, especially our vendors to get into the resellers that are the closest fit to where they think they can go to market. But -- so that's about the number worldwide.

Our next question is from Vincent Colichio with Barrington Research.

A nice quarter. In terms of organic growth, it looks like it accelerated this quarter. Should we expect this level of growth to continue in coming quarters?

We mentioned right at the end, that we expect to have a record year. We're already into almost done with October. And we're on that same trajectory that we did with Q3 just being up in the right over last year's Q4. So we're trying to clean up our line card, it's important for us. We talk about these top 70 brands, and that's what we go to market with, and then everything from 70 both goes to our climb Elevate team. . And that's a real focus that we've had over these last really 6 months to get transacting lines that just don't meet the criteria of a go-to-market Bushan -- good Colonel, which that team is growing very quickly and the rest of them so we can do more focus. But Yes. I mean, at this rate -- I mean we had a great quarter. There's no doubt about it. At the same level, of course, I want to be there. I think that's going to be a tough one, but we don't see it slowing down as far as this is just one bump of a quarter. Maybe just have a lot of our vendors performing at a great clip. And I think it's due to a lot of the -- or 70% in the cybersecurity space and a lot of it is because people have to secure their networks and they're securing it in so many different ways and making sure they go from a firewall to an endpoint everything in between with everything in the news you hear about an AI agent escaped and is doing an increasing habit on somebody's systems. So everybody is looking for ways to make sure that they aren't in the news.

Effective margin increased [ 30 ] basis points year-over-year. How much of that improvement is structural should we expect at that level or better to continue?

Yes. The -- so we're tracking for the full year on a effective margin percentage that we've historically seen, right? So when you look at it on a full fiscal year basis, we're in that low 40% range. That's definitely where we're continuing to track for 2026. . We did do some initiatives and some cost savings initiatives in Q3 that we executed upon. So that brought the -- as I highlighted in the call that brought the expenses as a percentage of gross profit down even compared to not only the first 2 quarters of this year, but in line with where we were in Q3 of last year. So it's really -- it's continuing to trend in the positive direction, kind of where we've seen our historical effective margin.

And then some of the investments you summarized in the ERP system and in the marketplace, will we see the results of that in margin in 2017?