Liquidity Services, Inc.
Q2 2019 Earnings Call Transcript

Published: 8 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Liquidity Services Second Quarter Fiscal Year 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Ms. Julie Davis, Senior Director of Investor Relations. Ma’am you may begin.

[Julie Davis:]

Thank you, Joelle. Hello, and welcome to our second quarter fiscal year 2019 financial results conference call. Joining us today are Bill Angrick, our Chairman and Chief Executive Officer; and Jorge Celaya, our Executive Vice President and Chief Financial Officer. We will be available for questions after our prepared remarks. The following discussion or responses to your questions reflect management's views as of today, May 8, 2019, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC, including our most recent annual report on Form 10-K. As you listen to today's call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. During this call, we will discuss certain non-GAAP financial measures. And our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. We also use certain supplemental operating data as a measure of certain components of operating performance, which we 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'd like to turn the presentation over to our CEO, Bill Angrick.

[Bill Angrick:]

Thank you, Julie. Good morning, and welcome to our Q2 earnings call. I'll review our Q2 performance and provide an update on key strategic initiatives. Next, Jorge Celaya will provide more details on the quarter and our outlook for the third quarter. Our Q2 results reflect continued execution of our RISE growth strategy and improving results across all of our business segments. As a refresher, our RISE growth strategy has four key pillars

[Jorge Celaya:]

Thank you, Bill, and good morning. First, I will comment on select second quarter results. We finished the second quarter of fiscal year 2019 above the company's guidance range for GAAP net loss, non-GAAP adjusted EBITDA, GAAP EPS and non-GAAP adjusted EPS and within the guidance range for gross merchandise volume, or GMV. As compared to the second quarter 2018, GMV and adjusted EBITDA were up and continued to reflect the positive trend line and successful execution of our RISE growth strategy. Comparing to the second quarter 2018, GMV improved 2%, net loss improved 23% and adjusted EBITDA improved 143%. Adjusted GAAP net loss improved $3.1 million. Our revenue was down 5% and reflects a wind down of the surplus contract. As these second quarter results reflect, we are successfully executing against our RISE strategy and have more than offset impacts on the completion of the DoD Surplus contract in the first half of fiscal year 2018. In the second quarter, we reported GMV of $155.4 million, reflecting year-over-year increases in our RSCG and GovDeals segments. RSCG GMV was up 18% from a year ago, due to increases in both existing and new client programs in both liquidation and reaffirms management service offerings. GovDeals GMV was up 11% from the second quarter of fiscal year 2018, driven by the additional sales volume from existing sellers and an increase in the number of new sellers. This was partly offset by a 0.2% year-over-year decrease in our CAG segment, which was impacted by the lower volume of goods sold under both our DoD Surplus and Scrap contracts. Partly offsetting both the contracts, GMV from our CAG commercial business was up 11% compared to a year ago. We reported second quarter of fiscal year 2019 revenue of $56.8 million that reflected strong growth in our RSCG and GovDeals segments and the inclusion of Machinio, offset by decreases in our CAG segment due to the DoD contract as compared to the second quarter of fiscal year 2018 results. GovDeals revenue increased 9%, and RSCG increased 26%. Our revenue from our CAG segment was down 26% as compared to the second quarter of fiscal year 2018 due to the completion of our DoD Surplus contract. Excluding both contracts, both DoD contracts, CAG commercial revenue grew 24%. Our GAAP net loss was $4.4 million, a $1.3 million improvement compared to $5.7 million a year ago. Adjusted net loss was $700,000, a $3.1 million improvement from a $3.9 million loss in the prior year quarter. Finally, our second quarter adjusted EBITDA was a positive $900,000, a $3.1 million improvement compared to negative $2.2 million in the prior year’s second quarter. These improvements were due to the top line growth in our RSCG segment and our GovDeals segment, higher CAG commercial activity and lower technology expenses, along with the good performance from Machinio. We continue to have a debt-free balance sheet. At March 31, 2019, we had a cash balance of $64 million. Capital expenditures during the quarter were $1.4 million, and we expect capital expenditures for the third quarter of fiscal year 2019 to remain in line with the current run rate. Looking ahead to the third quarter of fiscal year 2019, we anticipate that results will continue to reflect our efforts to execute our RISE strategy. The third quarter of fiscal year 2019 comparative results reflect top line growth in both our RSCG and GovDeals segments as we look to continue to drive recovery maximization, increased volumes and expand the services we offer sellers and buyers. We expect our CAG segment to face top line headwinds, reflective of strong activity in the third quarter of fiscal year 2018 in the North America and Asia Pacific regions, with both regions completing more episodic plant closures during the period last year. We expect the bottom line results to be impacted by increased spending on sales and marketing as we focus on executing our RISE growth strategy to improve recovery maximization and increase volume. Sequentially, the third quarter of fiscal year 2019 results will reflect a transition on a seasonally high quarter in our RSCG segment in Q2 to a seasonally high quarter in our GovDeals segment in Q3 and anticipate increased spending in sales and marketing. Management’s guidance for the next fiscal quarter is as follows. We expect GMV for Q3 of 2019 to range from $155 million to $175 million. The GAAP net loss is expected for Q3 2019 to be in the range of negative $6.7 million to a negative $4.3 million, with a corresponding GAAP loss per share for Q3 of 2019 ranging from a negative $0.20 to a negative $0.13 per share. We estimate non-GAAP adjusted EBITDA for Q3 of 2019 to range from a negative $2 million to breakeven. Our non-GAAP adjusted loss per share is estimated for Q3 of 2019 in the range of negative $0.12 to negative $0.05. This guidance assumes that we have diluted weighted average shares outstanding for the quarter of approximately 33.2 million and an effective tax rate in the single digits. We will now take your questions.

[Operator:]

[Operator Instructions] Our first question comes from Gary Prestopino with Barrington Research. Your line is now open.

[Gary Prestopino:]

Hi, good morning everyone. Series of questions here. Are you still on track to get this consolidated marketplace out by the end of calendar 2019, Bill?

[Bill Angrick:]

Correct, yes.

[Gary Prestopino:]

Okay. And then in terms of ongoing LiquidityOne expenses in this quarter and going forward, are you still looking at between $1 million to $2 million of expenses that once this initiative is over with, we’ll channel down substantially?

[Bill Angrick:]

No. We’ve expressed before that we’ve tapered down those expenses in IT overall, including the expenses to launch the new e-commerce platform. And we’re still consistent with approximately $1 million, give or take, on a quarterly basis for probably the remainder of the year.

[Gary Prestopino:]

Okay. And then for – in the back half of the year, there’ll still be some drag from the DoD contract in the CAG group. Is that correct?

[Bill Angrick:]

The DoD Surplus contract ended – the residual ended in the second quarter of last year 2018. We still, of course, have the DoD Scrap contracts ongoing.

[Gary Prestopino:]

Okay. So there’s no more drag from the DoD Surplus?

[Bill Angrick:]

That’s correct.

[Gary Prestopino:]

Okay. And then a couple of other things here. Are – in terms of the – in the GovDeals marketplace, are you seeing any changes in the competitive landscape there at all?

[Bill Angrick:]

Well, that marketplace is a very fragmented marketplace. The nature of competition has not changed materially. Over time, the largest incumbent players are traditional auctioneers, many of which have local relationships with these agencies. What I do think is changing is the notion of a smart government looking to be the beacons of sustainability and open and transparent systems and very frugal in how they manage government resources. And I think those macro trends play to our strengths as we proliferate our GovDeals marketplace.

[Gary Prestopino:]

Okay. And then just two more questions. How much of your GMV now is consignment versus actual purchase by the company?

[Bill Angrick:]

That’s majority, and that’s trended anywhere from 75% to 80%.

[Gary Prestopino:]

Okay. It is consignment?

[Bill Angrick:]

Correct.

[Gary Prestopino:]

So then just as you go through this RISE strategy, and you’re talking about new services.

[Bill Angrick:]

Let me just add – can I just add to that? As you begin to look at how we think about the company’s financial model, we provide GMV guidance, we don’t provide GAAP revenue guidance. And as that mix shift of consignment increases, the take rate that drops to GAAP revenue on a relative basis is lower versus prior year periods when we had that higher component of the DoD Surplus contract, where 100% of the GMV dropped to GAAP revenue.

[Gary Prestopino:]

Right. So what I’m getting at is, as we look at the company, I mean how do we measure the success of you’re – of what you’re doing when you – based on – do you look at it in terms of – you can’t really look at it right now in terms of revenue to GMV. I’m talking about just increasing the take rate, increasing your realizations, I guess, is what I’m getting at is. How do you – how do we measure that? Or how would you measure that?

[Bill Angrick:]

Sure. I think you look at our business as a more diversified asset-light business over time, which is leveraging the core marketplace economies of scale. We’re integrating the underlying business processes. We’re driving more leverage. You want to keep an eye on gross profit and how the gross profit improves over time and our EBITDA as a percentage of both GAAP revenue and even gross profit. What we have demonstrated is there is a number of adjacent services that leverage our software that are creating significant value for retail supply chain customers in the case of returns management software, in the case of our scan and sell application and are creating value for our industrial supply chain customers. There are lots of large customers who, for many, many years, have sold high-value assets directly to buyers and have never been on our online auction marketplace. And we’re addressing that need by cross-selling our self-directed or self-service solutions. And so we expect that to be a theme over time, where we – you don’t say paddle through these assets, but we collect fees associated with those asset-light services.

[Gary Prestopino:]

Okay, great. Thanks a lot guys.

[Operator:]

[Operator Instructions] I’m not showing any further questions at this time. I would now like to turn the call back over to Julie Davis for any closing remarks.

[Julie Davis:]

Thank you all for participating in today’s call. If you have additional questions, please reach out to me, and we can set up a follow-up. Thanks again, and have a good afternoon.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, and you may all disconnect. Everyone, have a wonderful day.