Q4 2022 Liquidity Services Inc Earnings Call

Speaker 2: Welcome to the Liquidity Services Inc. fourth quarter of fiscal year 2022 financial results conference call. My name is Carmen and I'll be your host for today's call. Please note that this conference call is being recorded. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. On the call today are Bill Engrich, Liquidity Services Chairman and Chief Executive Officer and Jorge Zelaya, its Executive Vice President and Chief Financial Officer.

Speaker 3: They will be available for questions after their prepared remarks.

Speaker 4: The following discussion and responses to your questions reflect liquidity services management's views as of today, December 8, 2022, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact the financial and financial markets in the future.

Speaker 5: liquidity services financial results as well as metrics and commentary on the quarter. During this call, liquidity services management will discuss certain non-GAAP financial measures.

Speaker 6: in 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 supplementer operating days.

Speaker 7: or superior to GAP results. At this time I will turn the presentation over to Liquidity Services CEO Bill Angrigg.

Speaker 8: Good morning and welcome to our Q4 earnings call. I'll review our Q4 performance and the progress of our business and next Jorge will provide more details on the quarter.

Speaker 9: We delivered strong EPS and adjusted EBITDA results during the quarter, despite macro challenges, which limited the supply of vehicles in our marketplace.

Speaker 10: This performance reflects our efficient business model and diversified client portfolio.

Speaker 11: During Q4, the strength of our buyer liquidity in a recessionary environment was on display as the number of auction participants and registered buyers on our platform grew 34% 24% year over year respectively.

Speaker 12: For the full year fiscal 2022.

Speaker 13: We generated a record number of auction participants and completed transactions on our platform, which provided outstanding results for our sellers.

Speaker 14: We estimate that the lack of vehicles for our customers fleet replacement cycles reduced our GMB by $10 million during the quarter.

Speaker 15: This, combined with abnormally low conversion rates on sheriff sales and a government real estate vertical, resulted in $2.4M.

Speaker 16: While these are currently headwinds, we expect these trends to normalize.

Speaker 17: boost our business as we move through

Speaker 18: For our full fiscal year 2022, we're proud of the focus and execution of our team.

Speaker 19: We continue to advance our strategic and operational objectives, which translated into a record 1.1 billion dollars of GMB, up 29% over the prior year.

Speaker 20: gap net income of $40.3 million and $42.7 million in non-gap adjusted EBITDA.

Speaker 21: We also grew our registered buyer base to a record $4.9 million, reflecting strong interest in our circular economy platform during this inflationary

Speaker 22: As we commence fiscal year 2023,

Speaker 23: We remain focused on expanding our mindshare and position with commercial and government clients as the most trusted marketplace to manage value and sell surplus assets in the circular economy.

Speaker 24: Despite near-term headwinds in vehicle supply, we have a strong business pipeline.

Speaker 25: continue to see opportunities to reach 1.5 billion dollars in annualized GMP and expand our technology-enabled asset-like services to drive long-term

Speaker 26: Our expertise in diverse sectors, strong buyer base across numerous asset categories, and global reach are continuing to provide advantages for our clients as they navigate this current volatile macro environment.

Speaker 27: Let's take a closer look at the progress of each of our segments and how we're

Speaker 28: Our Bell Field segment is making excellent progress in expanding the growth and activity of customers on its marketplace.

Speaker 29: We continue to grow the number of new accounts and number of assets sold in the mid to high single-digit percentages each quarter, despite the current headwind of lower vehicle supply.

Speaker 30: In fact, we set new records for these

Speaker 31: Additionally, we continue to make progress

Speaker 32: customer relationships as their one-stop solution for all asset sales including

For example, since fiscal 2020, our GMV per seller and the number of assets sold per seller on GovDeals have grown 44% and 19% respectively.

We're also committed to the relentless improvement of our platform and will be launching the next generation of our GovDeals marketplace in 2023.

The beta version of our new GovDeals Marketplace was shared with select bidders in Q4 and was extremely well received resulting in a two times increase in our customer net

This bodes well for the future and we expect our modernized GovDeals platform. An introduction of more data-driven features will increase our recovery rates and lift GovDeals GMV materially

As client vehicle replenishment cycles

Federal infrastructure spending takes hold, and we continue our pace of account acquisition.

we see the opportunity to significantly grow the size of our GovDeals business over the next three to five years.

In our retail segment.

Our flexible service offerings have been well received by the Marketplace as customers utilize both self-directed and fully managed solutions.

Leveraging our distribution center network to reduce supply chain costs and the sale of returned and shelf pulled goods.

While some clients have held onto returned inventory to offer customers compelling early how it deals.

We have a strong new business pipeline and have won.

several new programs in the big box.

Onme Channel, and Pharmacy sectors, which has continued to diversify and grow our business portfolio in the retail segment.

Our retail segment has a large market opportunity, driven by strong secular growth in the volume of return merchandise, as customers continue to embrace online retail.

For example, according to the National Retail Federation, retailers expect about 18% or $158 billion of merchandise sold during the holiday shopping season to be returned.

Our value-added services in particular have been highly prized by our retail segment customers as they help our clients reduce their supply chain costs.

Current results reflect that we are still early on in fully leveraging the investments we have made in three new distribution center facilities.

We expect retail segment margins to improve as we further leverage this.

added operational capacity, and drive

Our CAG segment continues to play the role of a trusted global market maker for high-value equipment in the industrial supply chain.

our ability to support cross-border transactions and financial settlements.

among counterparties has been increasingly valued given the broad application and demand for the industrial assets we sell.

For example, in a recent auction of biopharma assets in Europe ,

for multiple Fortune 500 clients.

We had over 100 bidders from 27 countries.

including 17 bidders from China where 60% of the assets were ultimately sold.

Our global reach was critical to giving our sellers the best execution.

Indeed, our CAG solutions are well positioned to help industrial companies who are in a cost savings mode manage through the current recessionary environment.

We anticipate growth in the energy, biopharma, and automotive verticals in particular, and we have landed new mandates with major companies in these areas.

As COVID restrictions loosen in China, we have attractive growth opportunities in the APAC region, which have been limited recently.

Finally, our CAG heavy equipment fleet category has strong upside potential.

We grew our consignment heavy equipment vertical 36% year-over-year in fiscal 2022 and finished the year ahead of plan for signed contracts, new sellers, transacted opportunities, and net new revenue. Wednesday June 21, 2018 What's YourWord

Finally, our Machinio segment continues to scale nicely, with expanded coverage and more equipment categories and related services such as financing.

We believe our Machinio digital advertising and storefront solution offers business customers cost savings and convenience.

that are well suited to a recessionary environment.

We've recently launched a self-directed option for smaller dealer customers.

to list their equipment directly on the

And we're also offering transaction-based services to Machinio customers to unlock valuable liquidity for sellers.

Finally, we've opened a new Machinio sales office in China and believe there is a significant growth opportunity for our Machinio Classified Marketplace and storefront platform in the China market over time.

In conclusion, we're focused on executing multiple drivers to create value for our shareholders over time.

We've continued to enhance our brand awareness in the marketplace.

plan to double our core business over the next three to five years.

which will be aided by the normalization of supply chains and our leverage of the fixed investments we've made in sales.

branding and marketing, technology, and operational capacity.

Moreover, our capital efficient business with a strong operating cash flow.

98 million dollars in cash and zero debt.

provides us with ample flexibility.

to execute our plans.

We've increased our authorized share.

repurchase capacity to $15 million, and we will continue to deploy our capital on organic growth initiatives, share buybacks, and tucking acquisitions.

In closing, we thank our team members across Liquidity Services for their dedication to our mission to power the circular economy to benefit sellers,

I'll turn it over to Jorge for more details on the quarter.

Good morning.

We completed the fourth quarter of fiscal year 2022 with $283.3 million in GMB, which was up 16% from $244.4 million in the same quarter last year.

Revenue for this fiscal fourth quarter was $75.2 million, up 7% from 7D.3 million in the same quarter last year and includes the completion of a high purchase transaction volume by our CAG segment.

As a reminder for our business model trend, higher growth of confinement, including growth in the real estate sector, will lower our ratio of revenue as a percent of GMB and cause revenue to grow at a slower rate percent than GMB.

This trend can be impacted in the reverse in any period where higher purchase transactions occur.

Specifically comparing segment results for this fourth quarter to the same quarter last year, our GovDeal segment was up 20% on GMB and 8% on Revenant, including bid for asset.

Our retail RSCG segment was up 10% on GMV and up 6% on revenue, and our TAG segment was up 13% on GMV and up 6% on revenue, reflecting an increase in sales conducted with partner organizations that are fully reflected in GMV.

Our retail RSCG segment was up 10% on GMV and up 6% on revenue, and our TAG segment was up 13% on GMV and up 6% on revenue, reflecting an increase in sales conducted with partner organizations that are fully reflected in GMV. Machinio revenue was up 18%.

Gap net income for this fourth quarter was $8.3 million, resulting in diluted gap earnings per share of $0.25.

This includes a $4.5 million or $0.14 per share non-cash gain from the reduction in fair value of the bid for assets burnout liability.

as the expectation of the timing of real estate asset flows continued to shift outside of the earn-out period.

non-GAAP adjusted EPS for this fourth quarter was $0.19, including approximately $0.03 of unfavorable impact to tax expense in the quarter.

for estimates of stock based and other variable compensation.

The total year 2022 effective tax rate was 15% on gap net income, reflecting the non-taxable earn-out gain, and 32% for adjusted net income.

non-GAAP adjusted EBITDA was $12.3 million.

up from the same quarter last year, primarily due to the higher revenue and reduced variable compensation expense versus the fourth quarter of last year to close out fiscal year 2022.

This was partly offset by a lower average segment gross profit margin in CAG on its higher mix of purchase activity this quarter, and the increased sales, operations, and technology expenses compared to a year ago.

We hold $97.9 million in cash, cash equivalents, and short-term investments.

We have generated operating cash flows of $44.8 million and performed $25.4 million of share repurchases on a trailing 12-month basis.

We have zero debt and $25 million of available borrowing capacity under our credit facility.

in the near term.

Our quarterly results and experience uncertainty in predictability as the current macroeconomic environment lends itself to hesitation by sellers and buyers in the timing of transactions for surplus assets in any given period.

As clarity over the direction or severity of global economic challenges unfolds, we would anticipate having better visibility ungrowth in the short term.

As a company, we are confident in our business model and strategic direction.

Our results in terms of revenue, profitability, and cash have remained solid, even during these turbulent times.

Our first quarter of fiscal year 2023 guidance range for GMB is above the same period last year with year over year growth expected across our segment.

relative to the fourth quarter of fiscal year 22, sequentially.

Seasonality is a factor, as GovDeal GMD may experience a seasonal decline sequentially going into this next fiscal first quarter.

Despite the expected year-over-year improvement in volume and buyer and seller activity,

We also expect CAGG's GMV to decline sequentially on lower purchase transaction volume completed during this last fourth quarter of fiscal year 22.

GovDeals is also experiencing continued headwinds from vehicle sales in both volume and pricing, given constraints on sales of new vehicles that are resulting in a dampening of availability of used vehicles for sale. However …

Heavy equipment assets in both GovDeals and CAG remain robust.

The retail segment expects to continue to diversify its seller base.

transitioning product flows in terms of sellers and categories.

Overall, the company sees opportunities to gain market share across our segment.

profit.

guidance for the first quarter of fiscal year 2023 reflects expected year-over-year top-line growth.

with higher labor costs.

and inclusive of increased sales, technology, and operations expense to support growth during 2023 across our segment.

We expect that our effective tax rate overall during fiscal year 2023 will remain at approximately 30 percent.

Management guidance for the first quarter of fiscal year 23 is as follows.

We expect GMB to range from $265 million to $295 million.

Gap net income is expected in the range of $1 million to $4 million with a corresponding gap diluted earnings per share range from $0.03 to $0.12 per share.

We estimate non-GAAP adjusted EBITDA to range from $7 million to $10 million.

non-GAAP adjusted diluted earnings per share is estimated in the range of 9 to 18 cents per share.

And the GAAP and non-GAAP EPS guidance assumes that we have between 33.5 and 34 million fully diluted weighted average shares of spending.

for the first quarter of fiscal year 23.

We will now take your questions.

Thank you. And as a reminder, to ask a question, simply press star 11 on your telephone. Again, that is star 11 on your telephone. One moment for our first question.

And we have Gary Presopino with Barrington Research. Your question, please.

All right. Good morning, everyone. Hey, Bill, a couple of things here. Number one,

You talked about the GMV being less than, or being hit by headwinds on the vehicle side, 10 million. Then you mentioned lower conversion rates on real estate. Is that a function of higher rates and sellers?

and buyers and sellers not coming together on an agreed upon price. I mean, was the potential flow through of real estate where you thought it was gonna be for the potential GMB post transaction completion?

Regarding the comment on the government real estate vertical what we've what we've observed Gary is that.

Local.

counties have made decisions.

to defer share of sales.

in part due to

consumer.

Friendly advocacy, which is highlighting.

some residual COVID policies to allow people to get back.

current with their real estate forbearance or current recessionary pressures, giving policy positions to defer some of these sales.

We think that is likely to normalize in reverse in 2023, and therefore these sales will happen. So it's not a bid ask spread issue. It's really a policy position where people have held back these sales to allow them to become.

paid off by the individual borrowers or owners.

You know, the other thing I would note in the real estate area is we have a very good pipeline and we have contracts that have been awarded that just haven't been implemented yet. And I think there has been somewhat of a backlog in how government agencies have been able to process their business. So, again,

Part of the larger picture for us is that we do think these things, this log jam will clear out in 2023 and that will give us more visibility and actual GMB traction in the real estate vertical.

The vehicles is a well-known industry-wide phenomenon. We've had conversations with our government clients, our commercial clients. We've had conversations with our government clients, our commercial clients, our commercial clients, and we've had conversations with our government clients.

their backlog down according to a municipal fleet agency.

they have said to us there's at least 5 million orders on the books for vehicles that have been backlocked.

So, it gives you a sense of the order of magnitude that agencies and commercial owners, they want the vehicles, they have the money for the vehicles, it's just they're not being produced at the rate that fulfills that demand. And so, as that...

flips from a headwind to a tailwind at some point, we think we'll benefit from it.

Okay.

And then could you talk a little bit about this next generation launch for the GovDeals business? What is different in that new – I guess it's a new product website that you're putting out there? Yeah. Well, that's a great question, and I think it's a very important thing. You know, the GovDeals –

user experience on the front end has been largely intact for

Over the decade and there's a lot of functionality there, but it is not at the same level of.

responsive design and data-driven search and...

one-to-one marketing as you would see on our All-Surplus platform. And therefore, it's really about the front-end user experience, it's about the taxonomy and the path to purchase being improved. It's about putting artificial intelligence tools in place, like we have in our All-Surplus Marketplace, the guide by...

We've got our data in the hands of our test customers already. Phenomenal feedback. As I mentioned, our Net Promoter Score for those that have used the new site more than doubled which is rare. So we think as that unfolds in 2023 it's just going to improve the city.

Path to purchase and the bidding activity and will improve pricing realize for the assets we sell for our government clients on gov deals.

Okay, thanks. I'll let somebody else go.

One moment for our next question, please.

And it comes from the line of George Sutton with Craig Hallam. Please proceed..

Thank you. Bill, I'm curious as you look at your retail segment, what is the ideal economic scenario for you to see success there, in your view?

Well, in terms of the macro trends, one, you want to have robust growth in online sales, online retail, we think that's a well entrenched habit among consumers. And we think that is a secular growth area in the economy. And that is.

a catalyst for our business because the more that's sold online, as I noted, the NRF data, the more that's going to be returned, over $150 billion of returns just in the holiday season. So, that's a good thing. I think bargain hunting kind of environments are a good thing on the buyer side.

So when we have a little bit of a ripple around recession, buyers are looking for deals. So they're going to be looking to save money and our buyer base has been very active as I noted on our metrics.

I think that's a positive. In terms of the retailers themselves, I think retailers are kind of balancing wanting to have good deals in stock. And we all got emails probably in October for holiday sales. So they pulled forward a lot of those Black Friday.

concepts earlier in the year. So they were holding some inventory maybe that they would have otherwise liquidated. But I think as you get out of the holiday season you're going to see you know normalization of flows into our reverse supply chain and I think retailers are going to be looking to be.

you know, continue to invest in omni-channel experiences, continue to invest in convenience through their core e-commerce platforms. I think, you know, the consumer, you know, the Bank of America data that came out says the consumers still have more savings than they had pre-pandemic. So yeah, they're moving up very rapidly.

it seems like the consumer's holding up. I think that's.

net positive for the retail environment. And ultimately, we think that's helpful for us. The more spending on goods, the better. We've commented, George, how during the course of 2022, people had shifted their behavior from.

you know, buying goods to buying services and experiences. So that affected retail at large in some of their same store sales activity. And I commented earlier in the year that we feel like that's gonna reverse and people will normalize their spending behavior in 2023. So, you know,

I don't have the crystal ball, are we going to have a soft landing as the Fed tightens or something that's a little harsher? We would like to see more of a soft landing. We'd like to see the consumer continue to have discretionary savings and continue to.

normalized to where they were, you know, in early 2022, but even in the recession environment.

Our bargain frugal buyer base is a very strong competitive advantage. And I think if retailers have to cut costs and hollow out their corporate resources, they'll be more reliant on

value-added services and facilities that liquidity services offer. So we think we're well positioned there.

Looking at the vehicle supply side, in a very hypothetical, admittedly, scenario of a carvana, which could end up liquidating, not making a prediction, just it's a scenario suggestion, what would that potentially do for your business?

specifically in

The vehicle.

Category correct.

If there's a whole lot of additional vehicles all of a sudden on the market

a whole lot of additional vehicles all of a sudden on the market from a supply perspective.

Well, we, yeah, well, I can tell you that we've had conversations with.

wholesale automotive dealers who are looking in many cases for the first time to utilize our marketplace platform and create a new channel for liquidity.

If vehicles are sitting unsold, that's not a good thing for these automotive wholesale dealerships.

So, we present our marketplace as another avenue for that asset class to be monetized. And we sell – — through our marketplace.

As you know, a lot of vehicles in the used market and that liquidity is an asset for anyone looking to manage their balance sheet in the vehicle.

industry. Gotcha. And last question, and I don't know if it was simply a throwaway line in your text, but you mentioned expanding mindshare with customers this year and that being a focus. Could you walk?

through how you're planning to expand that mind share. Give us a little bit of a sense of the marketing plans.

Sure, well, we've invested in expanding our corporate communications team.

to do

I think very targeted.

brand awareness campaigns within these large corporate clients and in many cases government organizations to bring them.

the receipts, if you will, on the work that we've done, the actual transactions that we've completed, the case studies, the recovery that we generate. And so it's content that's created and then delivered through.

very targeted communications to influencers and decision makers that may not necessarily be direct clients of ours, but have oversight of the supply chain operations, the CFO's office, the compliance office within global.

Manufacturers, global retailers, government agencies, and that might be delivered digitally. And it might deliver you to a case study or a landing page and allow you to learn more. We also have industry specific insights that we're delivering, for example, in automotive energy and biopharma.

that give you, you know, I think relevant data on, you know, the market making activity in those areas. So, if you're a CFO , I think it's really helpful to know what on my balance sheet could I monetize to raise capital in a period where maybe we have to pull back from some of our spending.

I think that's been well received. We also have a presence as a thought leader and speaker in a number of government industry associations. We have national cooperative arrangements be directly as a result of these efforts. So we are really just

linking the data of our marketplace with insights and delivering that in a scalable way through a lot of digital marketing activities. And we do have recognition happening, George, through sustainability awards, through...

vendor excellence awards with many of our clients, and those are shared through more of a traditional corporate communications press release type format.

So just to be clear, and this is my final question, relative to spending for this objective, none of this sounds expensive. This seems simply a leveraging of your existing data. More so than anything, there's no needing to walk into Jorge's office for more dollars to achieve this. Yes, that's a-

for our next question.

Gary Presopino with Barrington Research. Please proceed.

Hi, just a couple of questions picking up on that last thought process. I mean, last year you said you were going through another kind of spending investment on sales, technology, et cetera. Is that really about over in terms of having to…

So I just want to get an idea as we go forward. Can we expect to see more of an equilibrium or even maybe sales growth that would be in excess of the OPEX expenses in fiscal 23?

In terms of.

in terms of the investments in expanding.

staff and operational capacity.

You're correct. We took a step up in fiscal 22. We will not see the same.

and step function growth in those areas in 2023. I mentioned

We have 3 new facilities that we funded essentially over a 12 month period to support demand in the retail segment.

in terms of the sales team and coverage, we still feel like we're under-penetrated, Gary, in many regions of the country. And it is an e-commerce platform, but we also know that having access to our team and our insights is helpful in attracting you.

clients and organizations both in the government market and the commercial market. So areas like Florida.

Thank you very much.

southeast, you know, region which has had huge migration in terms of population and therefore, you know, flush with.

municipal revenues, that's an area that's underpenetrated for us. So we are going to continue to find ways to serve those areas, but we don't in terms of rate of growth of spend that will moderate.

And when I talk about the God deals monetization.

you know, we're leveraging technologies that we've already deployed other places within liquidity services. So it's not a, you know, massive undertaking for us in terms of costs.

And, you know, it's an interesting time when you look at the amount of technology talent that's now in the marketplace. You've had massive layoffs in many of the big tech world. So, you know, we're always looking to be prudent and acquisitive if we can get great engineering talent.

through direct tires or aqua tires, but we don't see structurally any major.

step function increases in our spending.

Okay.

Thank you. I appreciate that.

Thank you, and I'm not showing any further questions at this time. Thank you, ladies and gentlemen. This concludes today's call. Thank you for participating, and you may now disconnect.

dollars. Gap net income is expected in the range of $1 million to $4 million with a corresponding gap diluted earnings per share range from 3 to 12 cents per share. We estimate non-gap adjusted EBITDA to range from $7 million to $10 million. Non-gap adjusted diluted earnings per share is estimated in the range of 9 to 18 cents per share. And the gap and non-gap EPS guidance assumes that we have between 33.5 and 34 million fully diluted weighted average shares outstanding for the first quarter of fiscal year 23. We will now take your questions. Thank you and as a reminder to ask a question simply press star 1 1 on your telephone. Again that is star 1 1 on your telephone.