Liquidity Services, Inc.

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 Engrick, 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 4, 2022, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact the 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 metrics and commentary on the quarter. During this call, Liquidity Services Management will discuss certain non-GAAP financial measures. 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 supplemental operating data as a measure of certain components of operating performance, which they also believe is useful for management and investors. This 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 turn the presentation over to liquidity services CEO, Bill Angrick. Bill Angrick Good morning.

And welcome to our Q3 earnings call. I'll review our Q3 performance index. 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 a volatile inflationary 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 $1.5 billion in annualized GMV. During Q3, we grew our GMV by 33% year over year to a record $325 million, our eighth consecutive quarter of 20% plus annual GMV growth. The growth in activity on our platform is due to our market leadership as the leading global commerce company powering the circular economy. Our solutions have 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, from retail, energy, transportation, construction, and healthcare 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 their 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 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 fight inflation and stay competitive. Our buyers range from small businesses to Fortune 1000 corporations and government agencies who use our platforms to source equipment to meet their operational needs. We enable them to quickly source the 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 by 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% of the GMV transacted on our platforms 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 maximize the value of the assets we bring to market. Through our ongoing investments in 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, construction, 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 GMV growth opportunity. By moving the sales process online, government real estate sellers are able to accelerate the sales cycle, reduce administrative costs, increase transparency, and deliver more money to the taxpayer and 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, and we expect this to continue, as demonstrated by several large energy equipment sales we recently announced. In the construction equipment vertical, our online sell-and-play solution is faster and and less expensive than legacy alternatives. It continues 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 by introducing new products and services. For example, in our machinio, segment we've expanded our advertising solutions in 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 between our liquidity services marketplace platforms and major retail industrial and government sellers and 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 iQube customer returns, and shelf-full inventory. In response, we opened a new 100,000 square foot distribution center facility in Kentucky to allow our retail supply chain clients to reduce their storage, transportation, and handling costs for returned and shelf-full 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 zero debt. We will continue to deploy our capital and reinvest our profits in organic growth initiatives, share buybacks, and tuck-in acquisitions. In closing, we thank our team members across Liquidity Services further dedication to our mission to power the circular economy in order to benefit sellers, buyers, 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 and product 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 through this potentially volatile period. We completed the third quarter of fiscal year 2022 with $325 million in GMV, another new quarterly record. GMB was up 33% from $244.7 million in the same quarter last year. Revenue for this third fiscal quarter was $69.9 million, consistent with the same quarter last year. As previously highlighted, our long-term strategy has involved seeking higher growth in consignment lower-touch sales while continuing to offer full-service consignment and purchase options and other value-added services to our seller clients. The higher growth and 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 GMV over time. Despite market and market share increases, as reflected in our eight consecutive quarters of over 20%, year-over-year GMV growth. Specifically comparing segment results for this quarter to the same quarter last year, our GovDeal segment was up 52% on GMV and 13% on revenue, with the faster GMV growth reflecting the inclusion of BIT for Assets this year, which has lower average take rates on its higher value real estate asset sales. The retail RSCG segment was down 1% on GMV and 4% on revenue as we began to see some shift in return goods volumes to faster growing excess inventory volumes. And we also see a greater proportion of consignment GMV, reducing the revenue to GMV ratio. Our CAD segment was up 13% on GMV and down 8% on revenue. reflecting a year-over-year increase in sales during the quarter conducted with partner organizations. Machinia was up 27% on revenue, continuing its strength in its subscription business. While we experienced some delays in transaction volumes during the quarter for CAG and bid for assets within GovDeals, and vehicle volumes lower than anticipated at GovDeals, We are encouraged by the record GMB 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 50 cents and includes the higher effective tax rate in 2022 than 2021. the cash effect of the higher effective tax rate remains neutral as we maintain a U.S. tax NOL position. The gap net income and earnings per share includes an $11.5 million or $0.35 per share non-cash gain from the reduction in fair value of the bid for assets earn-out liability, as additional flows of originally expected auction activity are now expected 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 in sales and marketing and in our technology and business operations, which includes retail's expansion of their distribution center network to accommodate demand for its more diversified client base. We hold $88.3 million in cash and have zero debt, and $25 million of available borrowing capacity under our credit facility. We performed $5.4 million 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 million over the same period. Our gap net income for the same period was $64.7 million. Our GMV guidance. for the fourth quarter exceeds the prior year, as we are anticipating year-over-year GMV growth across our segments. While GovDeals will be coming off its seasonally high third quarter for its traditional business, the addition of bid-for-assets and its expected growth of real estate categories, along with GovDeals expansion in seller accounts, should result in improved GMV volumes. This, despite potential near-term headwinds, as government agency sellers may delay their vehicle fleet retirement timelines 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, and distribution network, and 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 through lower-touch services. CAG expects continued strength in the energy sector as the industry assesses asset needs in response to elevated energy prices. We see potential for growing low-touch services in the energy sector that would extend our sell-in-place offering beyond our heavy equipment sector within CAG. CAG also expects to complete a significant international purchase transaction with an industrial partner, which would result in a higher revenue as a percent of GMV ratio relative to 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, expected for the total year in the 15% to 20% range. The cash effect of this higher rate is neutral to last year, yet does increase tax expense and hence reduces GAAP and non-GAAP net income and EPS this year compared to last year. Albeit our non-GAAP profit guidance ranges are consistent with the prior year as top flight increases are expected to offset the higher tax rate and the growth tailored operating expenses undertaken in business operations, sales, technology, marketing earlier this year. Management guidance for Q4 of fiscal year 2022 is as follows. We expect GMB to range from $300 million to $330 million. GAAP mid-income is expected in the range of $3.5 billion to $6.5 million, with the corresponding GAAP diluted earnings per share ranging from $0.10 to $0.19 per share. We estimate non-GAAP adjusted EBITDA to range from $10 million to $13 million. Non-GAAP adjusted diluted earnings per share is estimated in the range of 18 to 27 cents per share. The GAAP and non-GAAP EPS guidance assumes that we have between 33.5 and 34 million fully diluted weighted average shares outstanding for the fourth quarter fiscal year 22. We will now take your questions.