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Business Context and Reporting Period

Company: Wayside Technology Group, Inc. (formerly Programmer's Paradise, Inc.)
Filing Type: Form 10-K Annual Report
Period Ended: December 31, 2006
Business Overview: The Company markets technical software, hardware, and services to software development and IT professionals in the United States and Canada. Operations are divided into two segments: Programmer's Paradise (direct sales to end-users) and Lifeboat (distribution to corporate resellers and VARs). The Company changed its name in August 2006 and transferred its stock listing from the NASDAQ Capital Market to the NASDAQ Global Market in December 2006.

Key Financial Metrics (Year Ended Dec 31, 2006)

Segment Performance: Lifeboat sales grew 53% to $128.6 million, while Programmer's Paradise sales remained flat at $53.7 million. Lifeboat gross margin declined to 7.5% from 9.0% due to aggressive pricing and product mix shifts.

Material Changes vs. Prior Period

• Revenue Growth: Driven primarily by the Lifeboat segment, which now represents 71% of total sales (up from 61% in 2005). Growth was fueled by the expanding virtual infrastructure market and new vendor lines.
• Margin Compression: Overall gross margin decreased to 9.3% from 10.9%. This reflects the higher volume of lower-margin distribution sales in the Lifeboat segment and competitive pricing pressures.
• Expense Management: Selling, General, and Administrative (SG&A) expenses remained flat at $12.2 million despite revenue growth, resulting in SG&A as a percentage of sales dropping from 8.9% to 6.7%. This was achieved by reducing direct selling costs in the Programmer's Paradise division, offset by increased IT and marketing staff.
• Tax Provision: Income tax provision increased to $2.3 million from $0.4 million. The 2005 figure was artificially low due to a $0.9 million reversal of a deferred tax valuation allowance, which did not recur in 2006.
• Liquidity: Cash and cash equivalents increased by $6.4 million, driven by $6.1 million in operating cash flow. The Company has no long-term debt.

Outlook, Risks, and Management Commentary

• Guidance: Management does not provide specific numerical guidance but notes that gross profit margins may be less than 2006 levels in future periods due to the continued growth of the lower-margin Lifeboat segment and competitive pricing.
• Strategic Initiatives: The Company is focusing on increasing management control over pricing, targeting high-margin products, and selling services to slow the decline in gross margins.
• Key Risks:
  • Competition: Intense price competition from vendors selling direct to end-users and other resellers.
  • Vendor Dependence: Significant reliance on key vendors; VMware accounted for 53.4% of total purchases in 2006, and Ingram Micro accounted for 11.2%.
  • Customer Concentration: CDW Corporation accounted for 15.8% of net sales in 2006. The top five customers represented 28% of total sales.
  • Technology Shifts: Risks associated with the shift to Electronic Software Distribution (ESD) and direct-to-consumer sales by publishers.
• Unusual Items: The Company recorded a $97,000 charge in Q2 2006 related to the closure and subleasing of a sales office in Hauppauge, New York.

Investor Verification Checklist

• Vendor Concentration: Verify the stability of the relationship with VMware, which represented over 50% of total purchases.
• Customer Concentration: Assess the risk associated with CDW Corporation representing nearly 16% of revenue.
• Margin Sustainability: Monitor future gross margin trends given the shift toward the lower-margin Lifeboat distribution model.
• Stock-Based Compensation: Review the impact of the new SFAS 123(R) adoption, which added $0.3 million in expense in 2006, and the $4.0 million in unrecognized compensation costs for non-vested awards.
• Dividend Policy: Confirm the sustainability of quarterly dividends ($0.54 per share in 2006) given the cash burn from operations and capital allocation.