Q3 2022 Liquidity Services Inc Earnings Call
Welcome to the liquidity Services' third quarter of fiscal year 2022 financial results Conference call. My name is Vanessa and I will be your operator for today's call on the call today are bill angry at liquidity services, Chairman and Chief Executive Officer, and Jorge Celaya, its executive Vice President.
And Chief Financial Officer, they will be available for questions. After the prepared remarks, the following discussion and responses to your questions reflect liquidity services management's views as of today August 4th 2022 and we will not it will include forward looking statements actual results may differ materially.
Information about factors that could potentially impact our financial results is included in today's press release and filings with the SEC, including the most recent annual report on Form 10-K, as you listen to today's call. Please have the press release in front of you, which includes liquidity services' financial results as well as <unk>.
Tricks and commentary on the quarter. During this call liquidity services management will discuss certain non-GAAP financial measures and its press release and filings with the SEC each of which is posted on its website you will find additional disclosures regarding these non-GAAP measures, including the reconciliations of these measures with the comparable.
GAAP measures as available liquidity services management.
Also use certain supplemental operating data as a measure of certain components of operating performance, which they also believe is useful for management and investors. The supplemental operating data includes gross merchandise volume and should not be considered a substitute for or superior to GAAP results at this time I will.
I'll turn the presentation over to your liquidity Services' CEO Bill and Greg.
Good morning, and.
Our Q3 performance and next Jorge Celaya will provide more details on the quarter.
Our marketplace platform and team continue to deliver important supply chain efficiencies for our customers and help them navigate.
Volatile.
<unk> economic environment still fraught with unique supply chain challenges.
We are making excellent progress in executing our strategic plan.
And we're very excited about the opportunity that lies ahead to expand our market leadership in the $100 billion circular economy.
A few key highlights from Q3.
First.
We continue to scale our business towards our objective of one $5 billion in annualized G. M D.
During Q3, we grew our <unk> by 33% year over year to a record $325 million, our eighth consecutive quarter of 20% plus annual GMB growth.
The growth in activity on our platform is due to our market leadership.
As the leading global Commerce company power.
Powering the circular economy.
Our solutions.
I've never been more relevant.
And are helping retailers manufacturers and government agencies to smartly manage and monetize underutilized assets with speed reliability and excellent recovery.
Our solutions are actively used in every major industry vertical in our economy.
Retail energy.
<unk> construction.
And health care to save money.
Free up capital and space.
And reduce waste.
In turn we provide buyers most of whom are small businesses and entrepreneurs the opportunity to save money in an inflationary environment.
Grow their own businesses and make a positive impact on the communities.
In this manner.
Our business can be best described as a constant cyclical.
Business, one that can prosper both in periods of economic expansion.
Inflation.
And even contraction.
Secondly, we continue to grow.
Our network effect.
As we expanded the volume and type of assets on our platform during Q3, we.
We saw a 22% year over year increase in the number of registered buyers.
A 43% year over year increase in the number of auction participants.
And a 37% year over year increase in the number of completed transactions on our platform.
Buyers know that on liquidity services platforms, they can find and buy valuable inventory and equipment.
In a trusted and transparent manner, which helps them.
Inflation and stay competitive.
Our buyers range from small businesses to fortune 1000, corporations and government agencies, who use our platform to source equipment to meet their operational needs.
We enable them to quickly source they needed items at lower cost and more quickly than waiting on newly manufactured items to arrive.
Finally, this reinforces our role in the circular economy.
Obviating, the need to manufacture new goods, which saves energy and natural resources for our planet.
Next we continue to see strong adoption of our consignment model.
During Q3, 89%.
The GMB transacted on our platform was under our consignment pricing model.
Up from 85% in the prior year period.
We believe strongly in the consignment model because it aligns incentives.
Between liquidity services and our sellers to.
To maximize the value of the assets, we bring to market.
Through our ongoing investments and an enhanced user experience marketing technology.
And growing our buyer base.
We are able to increase the value realized by our sellers.
And in turn liquidity services.
Shareholders.
We've also made strong gains in several high value asset categories.
Including real estate and <unk>.
<unk> and energy equipment.
We've continued to expand the number and breadth of government sponsored real estate sales.
Using our platform.
Including several high profile sales from California to Florida.
During Q3.
We continue to view.
Online real estate sales is a $1 billion annual GNP growth opportunity.
By moving the sales process online government real estate sellers are able to accelerate the sales cycle.
Reduce administrative costs increased transparency and deliver more money.
So the taxpayer in their local communities.
In the energy vertical we recorded one of our strongest quarters in the past five years during Q3 as our online model continues to gain traction with large multinational energy companies.
We expect this to continue.
As demonstrated by several large energy equipment sales, we recently announced.
In the construction equipment vertical our online selling place solution.
As faster and less expensive than legacy alternatives.
Can use to gain share with fleet owners.
We expect our commercial construction equipment business to grow organically by over 30% during fiscal year 2022.
Next we continue to innovate.
Introducing new products and services for example.
And our machine segment.
We've expanded our advertising solutions and more equipment categories and related services such as financing.
Which together helped drive 27% year over year organic growth.
In this segment.
We've also developed technology integrations.
Our liquidity services marketplace platforms and major retail.
<unk> and government sellers.
To help them list assets directly on our platform with greater speed.
And accuracy.
This allows our selling customers to achieve better business outcomes and for LSI to continue its expansion of asset light self directed solutions.
Another example.
Many clients came to us with their challenges on how best to handle the management and sale of high cube.
Customer returns and shelf pull inventory.
In response, we opened a new 100000 square foot distribution center facility in Kentucky.
To allow our retail supply chain clients to reduce their storage transportation and handling costs were returned and shelf whole goods.
This will enhance our clients' financial bottom lines and also meet their sustainability objectives through carbon footprint reductions.
Finally, we continue to operate a very capital efficient business with strong operating cash flow over $88 million in cash and.
And zero debt.
We will continue to deploy our capital.
And reinvest our profits and organic growth initiatives share buybacks and tuck in acquisitions.
In closing we thank our team members across liquidity services further.
Or their dedication to our mission.
The power of the circular economy.
In order to benefit sellers.
And the planet.
I'll now turn it over to Jorge for more details on the quarter.
Good morning.
We have continued to advance our strategic initiatives and diversification by growing our client base.
<unk> categories, we sell.
While expanding our low touch asset light service offerings.
While the current macroeconomic environment may present challenges to some of our clients.
We expect that our flexible service offerings will be an advantage to our sellers and buyers as they navigate.
So this potentially volatile period.
We completed the third quarter of fiscal year 2022.
With $325 million in <unk>, another new quarterly record.
<unk> was up 33% from $244 $7 million in the same quarter last year.
Revenue for the third fiscal quarter was $69 $9 billion consistent with the same quarter last year.
As previously highlighted.
Our long term strategy has involved seeking higher growth and consignment lower touch sales, while continuing to offer full service consignment and purchase option.
Other value added services to our seller clients.
The higher growth in proportion of lower touch consignment is consistent with our long term strategy and has the overall effect of lowering our ratio of revenue as a percent of <unk> over time.
Spice market and market share increases as reflected in our eight consecutive quarters of over 20% year over year <unk> growth.
Specifically comparing segment results for this quarter.
For the same quarter last year, our Gov deals segment was up 52% on GMB and 13% on revenue with the faster <unk> growth, reflecting the inclusion of bid for assets. This year, which has lower average take rates on.
It's higher value real estate asset sales.
The retail our <unk> segment was down 1% or <unk>.
And 4% on revenue as we began to see some shifts and returned goods volumes.
To faster growing excess inventory volumes.
And we also see a greater proportion of confinement GOP, reducing the revenue to <unk> ratio.
Our <unk> segment was up 13% on GSV and down 8% on revenue.
Reflecting a year over year increase in sales during the quarter conducted with partner organizations.
The CDO was up 27% on revenue continued its strength and its subscription business.
While we experienced some delays in transaction volumes during the quarter for CAG and bid for assets within Gov deals.
And vehicle volumes lower than anticipated at Gov deals.
We are encouraged by the record <unk> quarter, and the resilience of our strategy and business segment diversification that continues to generate strong profitability and cash flow.
GAAP net income for this third quarter was $16 4 million.
Resulting in diluted earnings per share of <unk> 50.
That includes the higher effective tax rate in 2022.
2021.
The cash effect of the higher effective tax rate remains neutral as we maintain a U S tax NOL position.
The GAAP net income and earnings per share includes an 11 $5 billion or <unk> 35 per share noncash gain from the reduction in.
Fair value of the bid for assets earn out liability.
As additional flows of originally expected auction activity.
And now expect it to fall outside of the earn out period.
non-GAAP adjusted EBITDA was $11 9 billion down from the same quarter last year, reflecting increased operating expenses and sales and marketing and in our technology business operations, which includes retail expansion of the distribution center network to accommodate demand.
More diversified client base.
We hold $88 $3 million in cash and zero debt and $25 billion.
Of available borrowing capacity under our credit facility.
We performed $5 $4 billion in share repurchases during the quarter.
We have generated operating cash flows of $42 $2 million on a trailing 12 month basis, which compares to adjusted EBITDA of $41 $8 billion over the same period.
Our GAAP net income for the same period was $64 7 million.
Our <unk> guidance.
For the fourth quarter exceeds the prior year as we are anticipating year over year GMP growth across our segments.
While Gov deals will be coming off the seasonally high third quarter <unk> traditional business.
The addition of bid for assets.
Its expected growth of real estate category.
Along with Gov deals expansion and seller accounts should result in improved <unk> volume. This despite potential near term headwinds as government agency sellers may delay their vehicle fleet retirement timeline.
In response to continued supply chain issues impacting new vehicle production.
Which in turn can impact volumes and pricing of used vehicles sold.
Retail remains focused on diversifying its product flows sales channels of distribution network.
It also expects.
To help its clients with solutions for managing excess inventory.
In response to recent changes in general consumer sentiment.
Many of our retail clients last year were handling flows containing more higher value returned products and some lower touch services.
As expected continued strength in the energy sector as the industry assessments.
Asset needs in response to elevated energy prices.
We see potential for growing low touch services in the energy sector.
Would extend our sell in place offering beyond our heavy equipment sector within the cap.
<unk> also expects to complete a significant international purchase transaction with an industrial partner.
Which would result in a higher revenue as a percent of <unk> ratio relative.
Two our Q3 results.
Primarily due to our improved profitability and long term prospects, we released our U S deferred tax valuation allowance last year.
Resulting in a higher effective tax rate this year.
<unk>.
For the total year in the 15% to 20% range.
The cash effect of this higher rate is neutral to our lap last year, yet does increase taxes expense and hence reduces GAAP and non-GAAP net income and EPS this year compared to last year.
Albeit our non Gov.
<unk> guidance ranges are consistent with the prior year as top line increases are expected to offset the higher tax rate and the growth tailored operating expenses undertaken business operations sales technology marketing earlier this year.
Management's guidance for Q4 of fiscal year 2022 is as follows.
We expect <unk> to range from 300 million to $330 million.
GAAP net income is expected in the range of $3 5 billion to $6 $5 million with a corresponding GAAP diluted earnings per share ranging from 10 to 19 tons per share.
We estimate non-GAAP adjusted EBITDA to range from $10 billion to $13 billion.
non-GAAP adjusted diluted earnings per share is estimated in the range of 18% to 47 per share.
The GAAP and non-GAAP EPS guidance.
Assumes that we have between $33 $5 34 billion fully diluted weighted average shares.
Sterling for the fourth quarter of fiscal year 'twenty two.
We will now take your questions.
Thank you we will now begin the question and answer session. If you have a question. Please press zero then one on your Touchtone phone if you wish to be removed from the queue. Please press zero then too if youre using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question.
Please press zero than one.
And we have our first question from George Sutton with Craig Hallum.
Thank you guys.
So.
I wanted to look generically at the market opportunities as they exist today.
Government vehicle retirements, which I understand them pack to you a little bit on the supply side, but when we look at rising inflation, we look at increasing retail inventory levels and then of course supply chain uncertainties generically. Those are all very positive drivers for your business I just want to make sure.
I'm, putting this correctly in context in terms of the opportunities as you see them.
George Thanks for the question.
Certainly the supply side.
Has grown relative to <unk>.
Retail supply chain challenges and issues so.
The investments that we have announced are directly correlated to.
Retail supply chain participants asking for assistance.
In terms of fully managed services, where we provide the space in the marketplace to manage itself.
Not only returned goods, but.
Shelf pull inventory.
Additionally.
We have been investing in the technology integration between our marketplace through Api's.
To connect with our clients' financial inventory management systems, because clients have asked for the opportunity to be able to sell goods from their locations directly on our platform and depending upon the cube size and handling costs clients might do one or the other so the macro trend there.
Is very favorable for us.
I would point out.
In Q3 like everybody in the E Commerce, we saw.
Trade down in the value of goods being purchased.
At retail whether online or in store.
Yet our business.
Handled this very well because we have a more diversified.
Set of drivers across industry vertical.
And we have continued to gain share with new accounts.
My view is that there was.
A little bit of a reset and how consumer wallet was moving away from let's say shopping to travel to out of the home experiences, but I think we feel again broadly speaking as we move through.
The next two seasons back to school and holiday.
Personal consumer balance sheets are solid.
We're well positioned because we provided clients with what they've asked for and they can work with us in multiple ways and we think thats.
The benefit regarding inflation.
There's no question that buyers look at liquidity services marketplaces, as a way to save money and stretch their dollar.
As true for not only micro businesses entrepreneurs and small businesses. That's also true for major corporations and government agencies, who buy on our platform to access.
High value equipment.
It's less expensive it's immediately available they can deploy that in their operations and so we find that to be very virtuous in terms of the network effect, we have people that sell on our platform. They turnaround at need supplemented by on the platform. So those I think are strong macro trends and reinforce the strength of our business model.
Just a follow up on the flywheel and slash network effect concept.
Very impressive 43% increase in auction participants impressive 37%.
Completed transactions I'm, just curious because you don't give seller numbers.
Help us understand how you are investing in bringing on more sellers onto the platform, obviously youre seeing a big increase in the number of buyers.
Where are you spending the SaaS.
Vast majority of of your spend.
Sure I think this is a combination of.
Human capital and technology.
Breaking that down further on the human capital side, we continue to build our domain expertise to understand.
The industry context, and the specific assets that are being sold in industry verticals like real estate.
Energy supply chain construction.
Construction.
Transportation and.
And that is your classic enterprise sales organization.
Creating.
Awareness the table to connect.
Our clients pain points with our solutions help nudge people along with the sort of digital first solutions get people out of let's say an analog solution.
We started that process.
Many years ago, and we've added capacity to.
Champion liquidity services as a best practice and all of those high value verticals, along with traditional verticals like retail supply chain. So we have added Russ.
Roughly 20% or a head count coming into fiscal 'twenty two versus the prior year and the large portion of that is an enterprise sales as well as marketing and the marketing side of the house, we're very adept at using sort of demand generation technology getting people to learn about.
For best practice forums, finding out information about us.
Following a case study that we've published back to Bill.
That feeds our enterprise sales organization. We've also been very adept at using account based marketing technologies to go inside deeper with very large multinational companies and in some cases government agencies, who are already doing business with but we can further penetrate that account and so we have.
Find that latent potential with companies were already doing business with perhaps not in all geographies and not in all.
Business segments that I think those two are very powerful.
Ways to capture the market opportunity.
Got it so just one more question if I could.
Seen some interesting legislation in markets like Oklahoma, Mississippi, Pennsylvania, we've seen.
Certain cities and counties, taking their entire auction business online can you just talk about that trend generally in terms of.
What kind of velocity you are seeing how significant can that be in your opinion.
I think.
We're at the cusp of virtually every.
Government <unk>.
<unk> see municipality looking at what what defines a smart city or what defines.
The most sustainable.
Set of best practices to manage.
The assets within.
The infrastructure of the city and we are in the heart of that discussion with the ability to provide a lot of data to contribute too.
Net cost benefit analysis.
Both in terms of.
What can be sold what can you realize value for what what's the way to accelerate the sales cycle, what's the way to publish.
The data on carbon footprint savings.
Cost savings for framing up idle space used to store assets and I think it's a big opportunity I think.
Anywhere you live or work as opportunities to be more efficient and there's no question that in many parts of the country people need to find ways to be more efficient the tax base might be challenged during this great migration from one area of the country to another so we're having that conversation with dish.
Cision acres at the state and local level. We're also.
Emulating in advancing policy decisions that turn into laws on the books that are.
Creating first of their kind.
Legislation to allow.
Online sales.
That's obviously up.
We believe strongly in something that we think we can demonstrate real value for legislators and we've had success there.
And a number of jurisdictions and that I think is opening up what we see on the on the public sector side.
As a $3 billion to $4 billion <unk> opportunity.
We're well entrenched to be the.
Best in class there and take this to the next level and I think what that means.
Just take a look at real estate I think we see that as a 1 billion <unk> opportunities. When you look at the migration from combustion engine to E vehicles over time, we're right in the middle of that providing.
Services marketplaces and solution to reduce that that pain of making that transition.
And I think this is also influencing corporate clients.
Who are taking a cue from certain policymakers on how they can get ahead of the curve and providing things like are assets on service for industrial clients to track and manage all of their underutilized equipment throughout the organizations throughout the world and feed that into a marketplace like ours is another smart way to manage the business. So we think.
Combined with.
Sustainability goals combined with the need to be more efficient and then a desire to modernize infrastructure through the build back better legislation that's worked its way through.
Congress and I think now people are looking at how do I spend money too.
Great roads bridges facilities water treatment facilities energy power generation facilities that clearly will benefit citizens.
And society, but also require people to help.
Manage the sale of legacy assets. So we look forward to that.
Perfect.
I appreciate it.
Thank you. Our next question is from Gary <unk> with Barrington Research.
Hey, good morning, everyone I have several questions first of all.
On the income statement George it looks like your G&A expense was down almost 17% year over year. If I'm correct on that was there some kind of a reversal of an accrual there that caused that to happen.
Yes, Gary.
As we get here closer to the end of the year.
Some of our variable comp.
There is some reversal for that.
Given what our expectations now are for the year.
Okay, that's fine.
And then bill in general.
You put up two warehouses. This year, we went through another kind of investment spending cycle.
Are you where you need to be.
As you scale this business.
To where you wanted to get to in terms of Gm's I guess, I guess, what I'm kind of asking us.
The current platform that you have in physical.
Facilities and technology.
Can you where can you grow that GMB without going through another big spending cycle.
Well, we're at $1 $4 billion run rate.
We think the glide path is on track with what our stated goal was with one 5 billion and I don't see us, making massive infrastructure investments around.
Distribution center space, where we see the growth and we commented on the on the call was.
Consignment model has been embraced.
Doing a lot of tech integration.
<unk> support self directed sales.
We are responding to client needs I think that the infrastructure that we have today certainly could take us.
Another half a billion dollars of sales, so, let's say up to $2 billion of annual GMB and Thats a function of us being.
Very asset light are continuing to find those high value asset categories to drive through the platform, where we don't have to take possession of those assets.
Sure.
Use physical facilities clients have smartly thought about.
Selling directly on our platform from their location. So we've invited that integration I think that's a really sticky.
Value added.
Integration process, so, we're really thinking about making sure that.
When people think of.
Sustainability think of asset disposal in the context of the industries. We serve they know about liquidity services to have access to our past performance is displayed and case studies that were involved with the industry associations, who are making policy.
In some cases, the legislative process to formulate.
Open and transparent.
And market friendly rules and regulations.
And that's what this is about.
Okay.
And then just just lastly can you.
Maybe talk a little bit about.
It looks like your gross profit in the CAG segment in the retail segment was down and I understand that that is going down as a percentage of <unk>, but as a percentage of revenue going down as well.
And I'm just wondering is that you're talking about theres less high value added items and the retail side, the CAG side youre, having some issues with supply chain and stuff like that but is that indicative of that.
The buyers are pulling back on paying escalated prices because the things that you're.
Youre selling because it would seem that if you're moving more towards a consignment model continued to do so.
At.
Your your actual costs would come down for <unk>.
And then.
Assets, so could you comment on that a little bit please.
Sure well.
We like.
The trend lines in terms of the overall mix shift in our business and.
We don't want to be callous.
And interacting with the marketplace.
Clients.
Truly value and will pay for value added services.
Such as.
Fully managed distribution center solutions.
In some cases.
Onsite technology integration, we're going to provide that but what we've seen over time is that the mix shift towards consignment is clear.
And that in that model.
We're really dealing with a very high gross profit margin percentage is.
Percentage of GAAP revenue and you can see that in the segment table in the earnings press release.
Youre looking at <unk>.
Businesses like.
About deals.
Capital assets group.
Machining.
That's very high margin business as a percentage of GAAP revenue and Thats, where I think the world is going.
And we are providing the platform solutions to take clients in that direction and I had mentioned how incentive aligned the consignment pricing model as we double the sales value realized.
Assets in our marketplace and our clients getting the vast majority of that upside. So we're totally focused on delivering that result.
And the retail business does have a mix of both self directed.
And purchase model business, but as a percentage of the overall consolidated results that has shrunk over time and again, we have certain clients that use both.
So we're we're agnostic to that there was commentary.
Industry wide and with their own print for Q3 that the mix of goods.
Being sold has.
Changed over the last 12 months.
And I think that's probably.
A little seasonal as people get into the travel season, and get distracted and do other things so.
There are some lower value goods relative to where we were a year ago I don't think thats necessarily permanent if you were going to bet on where people are going to be in the next.
<unk> 2436 month are they going to go physically to the department store chain in the mall or they're going to take advantage of the expanded delivery services and availability and convenience of shopping how do we think it's going to be the ladder and we think the share of online to total sales continues to grow we think it'll be up over the next few years, so we're well positioned to capture value there.
Sure.
Okay. Thank you.
Thank you.
We have no further questions.
This concludes our question and answer session.
Ladies and gentlemen, this concludes our conference.
Thank you for your participation and you may now disconnect.
Yes.