Description

Wayside Technology is nicely profitable, yields 8.2%, and has 52% of its market cap in cash. There is no debt. EV/E = 5, EV/EBITDA=3.3 (TTM 3/31/09). Furthermore, Wayside has come through a scary product transition and economic landscape with flying colors. Wayside was originally posted on VIC last September by andreas947 when it was uncertain how the company would cope with those stresses. The resolution of that uncertainty justifies a new write-up. The prior write-up was nicely done, so I am just going to hit the high points and changes to the thesis.

WSTG  markets software to software development and IT professionals in the US and Canada. It operates through two segments, Programmer's Paradise and Lifeboat. The Programmer's Paradise (WSTG's original name) segment sells technical software, hardware, and services for microcomputers, servers, and networks to individual programmers, corporations, government agencies, and educational institutions. The Lifeboat segment represents approximately 150 technical software vendors to corporate and value-added resellers (like CDW), consultants, and systems integrators.

Wayside believes that one of their competitive strengths lies in their relationships with smaller software suppliers who are generally treated poorly by Wayside's bigger competitors. Wayside claims that  "We specialize and pride ourselves on our software knowledge. We do not see software as an "add-on" to hardware. We know what we sell." This appeals to smaller suppliers.

WSTG focuses on gross margin, not revenues. It is unwilling to spend energy long-term in areas that provide revenue but little margin. So far, this has proved to be a winning strategy. They publicize to their customers that while many of WSTG's competitors advertise lower prices, those competitors jack up the total cost by adding other charges such as shipping and restocking. Nonetheless, irrational pricing by competitors has and will hurt Wayside.

Wayside had several good years as one of the first resellers of VMware. In 2007, 32% of their revenue was from sales of VMware products. By then however, profit margins in that business had shrunk to almost zero as a result of massive price competition. WSTG decided it was not going to play that game. In October 2008 its relationship as a VMware distributor was terminated. Mostly as a result of this, Q1 2009 revenue declined to $31.8 million from $40.5 million in the prior year. Despite this, Gross Margin Dollars increased in Q1 2009 from 2008 ($816k vs $803k) and Gross Margin % increased to 10.9% from 9.3%. The primary reason Q1 2009 net income declined from 2008 ($578k vs $629k) was due to lower interest income ($148k vs $234k). EPS was $0.13 vs $0.14 in Q1 2008. 2008 FCF was negative because of the large decrease in A/P attributable to the termination of the VMware agreement

Bear in mind that Q1 2009 was no ordinary quarter; this was when it seemed like the whole world was falling apart and customers needed approvals from three of their own Vice Presidents to use the toilet paper in the corporate bathroom. By the way, WSTG was also nicely profitable in Q4 2008 (EPS= $0.20). Once again Gross Margin Dollars were higher than the prior year; interest income and tax changes caused the minor decline in net earnings.

For full year 2008, EPS was $0.71, only slightly higher than the $0.60 dividend. However, with cash/marketable securities of almost $4/share, short-term earnings fluctuations do not endanger the dividend.

Risks:

Wayside is not a perfect investment. The shares trade by appointment so if you are going to invest in the company it should be with the understanding that it is not a trading vehicle. With an 8% yield, the wait should not be terribly unpleasant. If business started going poorly, however, it would be difficult to exit quickly. The high cash balance  provides a reasonable floor on intrinsic value.

WSTG started using its balance sheet strength to extend payment terms to customers with very high credit ratings. They believe this gives them a competitive edge while simultaneously letting their money earn a lot more than it would in government securities. Management claims that they have had no credit losses from this policy. There is $6.1 million (present value of payments due beyond 1 year) in this category (Accounts receivable-long-term), versus $21.3 in short term Accounts Receivable and $17 million in cash and marketable securities. The risk is obvious.

As is common in software distribution, sales suffer from the hockey stick effect. A large proportion of the quarter's shipments occur in the last few days of the quarter. This risk comes with the territory and is not unique to WSTG.

While many software developers and publishers have channels that do not rely on resellers, few have attempted to completely cut out resellers. If this were this to happen, that would be a big problem for all resellers.

Wayside management might do somethings stupid with their cash balance. They show no sign however of letting their ego get in the way of corporate profitability.

Catalyst

Wayside is too small to be a public company. It either needs to get a lot bigger, get bought by a larger competitor, or go private. Some VIC members might want to consider buying the whole company.