Liquidity Services, Inc.

Fiscal Year 2023 Financial Results Conference Call. My name is Gigi, and I'll be your operator 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 Angrick, 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 their prepared remarks. The following discussion and responses to your questions reflect Liquidity Services Management's views as of today, February 2, 2023, 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 in 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 in 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 uses 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 now turn the presentation over to Liquidity Services Chairman and CEO, Bill Angrich.

Good morning and welcome to our Q1 earnings call. I'll review our Q1 performance and the progress of our business segments. and next Jorge Celaya will provide more details on the quarter. We delivered strong EPS and adjusted EBITDA results during the quarter despite macro challenges which limited the volume of vehicles and real estate transacted in our marketplace. We estimate that softness in the vehicle category alone reduced our GMV by approximately $10 million during Q1. This combined with abnormally low conversion rates on share of sales in our government real estate vertical resulted in lower than expected GMV during Q1. While these are currently headwinds, we expect these trends to normalize and boost our business as we move through 2023. Our solid Q1 financial results reflect the resilience of our business when challenged with macroeconomic headwinds, including cautious consumer and business behavior. Our strategic priority remains investing in market share expansion, diversification and longer term growth. Our expertise in diverse categories, strong buyer base and global reach are continuing to provide advantages for our clients as they navigate the current volatile macro environment. With our strong business pipeline, trusted marketplace solutions and financial strength, we are well positioned to gain additional market share across our segments and create long-term value for our shareholders. Let's take a closer look at the progress of each of our segments and how they are driving market share expansion. Our GovDeal segment is making good progress in expanding the growth and activity of customers on its marketplace. However, this progress is currently being masked by headwinds in the used vehicle market where prices are 10% to 20% lower versus the prior year. We estimate that lower pricing combined with reduced vehicle supply will impact GovDeals GMV by 10 to $15 million in the current quarter. Our acquired bid for assets marketplace has been successful winning new contracts and driving digital adoption. However, the pace of rolling out these new programs and the volume of tax and judicial foreclosed real estate sales has been below expectation, in part due to uncertainty associated with higher interest rates and a slowing economy. Our continued market share expansion is reflected in the ongoing growth in the number of new accounts and number of assets sold each quarter by GovDeals. During Q1, we set new GovDeals records for the number of active sellers and number of assets sold, reflecting the strength of our marketplace. During Q1, we signed several notable new accounts, including the State of Nebraska Real Estate Division, Philadelphia School District, Boston Public Schools, City of Reno, Nevada, and the Sacramento, California Regional Transit Authority. Additionally, we continue to make progress penetrating our GovDeals customers as their one-stop solution for all asset sales, including their highest value assets. For example, during the quarter, we sold a helicopter for the Polk County, Florida Sheriff's Office for $2.2 million. We also continue to make progress with the beta version of our new GovDeals marketplace and expect the rollout of this new functionality later this year. We expect our modernized GovDeals platform will increase our recovery rates and lift GovDeals GMV materially over time. In summary, as client vehicle replenishment and real estate cycles normalize, 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 and helped us grow GMV and direct profit by 22% and 12% year over year respectively. Margins in this segment have been pressured as customers have traded down to lower value merchandise to save money in an inflationary environment versus the prior year period. Our new business development remains strong with notable interest in the housewares and pharmacy verticals. Current results reflect that we have yet to fully leverage the investments we have made in three new distribution center facilities. We expect retail segment margins to improve as we further leverage this additional operational capacity and drive productivity gains. Our capital asset group segment or CAG segment was below plan for Q1, but we delivered on plan for direct profit as we successfully executed numerous high value transactions during the quarter for our clients across the globe. Indeed, we remain the most trusted market maker for industrial capital assets and our inbound sales leads grew 60% in Q1 versus the prior year period, with strong interest in several sectors, including automotive, biopharma, and semiconductor manufacturing. Conversion of leads to executed transactions has been slower than normal, as many of our enterprise clients continue to assess their operational plans amidst changes in the global economic climate. Our ability to support global capital asset transactions has been increasingly valued given the broad application of the industrial assets we sell and the variation of supply and demand in different regions in the global economy. For example, during Q1, we completed the sale of an unused high-pressure hydrocracker reactor fabricated by Kobe Steel Japan. The asset was located in South Korea, and sold to a European buyer for renewable biodiesel applications. It highlights the unique ability of our marketplace to create commerce across the globe. Our CAG solutions are well positioned to help industrial manufacturers who are in a cost savings mode manage through the current recessionary environment. As COVID restrictions loosen in China, we continue to have attractive growth opportunities in the Asia Pacific region, which have been limited recently. Our CAG heavy equipment fleet category also continues to make progress growing signed contracts, new sellers, transacted opportunities, and net new revenue. Recent wins include several national accounts with strong upside potential. Finally, our machinio segment continues to grow its revenue and direct profit with enhanced traffic and more equipment categories, the introduction of self-directed listings, financing services, and market maker transaction services. We believe our Maschino digital advertising and online storefront solution offers business customers cost savings and convenience that are well-suited to the current macro environment. In conclusion, We're focused on executing multiple drivers to create value for our shareholders over time. We have continued to grow awareness of our solutions in the marketplace and 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 have made in sales, marketing, technology, and operational capacity. Our capital efficient business with strong operating cash flow, $79 million in cash and zero debt, provides us ample financial flexibility to execute our plans. We will continue to deploy our capital on organic growth initiatives, share buybacks, and tuck-in 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, buyers, and the planet. I'll now turn it over to Jorge for more details on the quarter.

Thank you, Bill, and good morning, everyone. As Bill has said, despite the macroeconomic challenges impacting key categories, we have continued to focus on expanding market share. While completing the first quarter of fiscal year 2023 with $270.8 million in GMB, up 4%, and $72.3 million in revenue are up 8% from $260.2 million and $66.7 million in the same quarter last year, respectively. The uncertain economic climate and global supply chain disruptions can affect volume, timing, and type of assets and inventory available for sale in any given period. Specifically comparing segment results for this first quarter to the same quarter last year, our GovDeal segment was up 3% on GMV and down 3% on revenue and segment direct profit, mainly impacted by the supply of vehicles. Our retail or RSCG segment was up 22% on GMV, up 19% on revenue, and up 12% on segment direct profit that reflects current market-driven increases in the mix to lower value products. Our TAG segment was down 10% on GMV and down 16% on revenue, fall down 2% on segment direct profit due to favorable margins on international transactions. Machine year revenue was up 15% and segment direct profit was up 16%. GAAP net income for the fiscal first quarter was $4 million resulting in diluted GAAP earnings per share of 12 cents up from 10 cents in the same quarter last year. Non-GAAP adjusted earnings per share for this first quarter was $0.19 up from $0.18 in the same quarter last year. Non-GAAP adjusted EBITDA was $9.8 million up from $9.4 million the same quarter last year, mainly reflecting the higher GMV and revenue, partially offset by the planned year-over-year investments in operations and technology and higher sales and marketing expenses to support market share expansion, diversification, and longer We hold $79.9 million in cash, cash equivalents, and short-term investments, and performed $7.2 million of share repurchases during the quarter. We have zero debt and $25 million of available borrowing capacity under our credit facility. Our fiscal second quarter guidance range for GMV is consistent with the same period last year. and reflects the headwinds being experienced currently across the global economy. As our business is impacted by the macro supply and pricing of vehicles and macro conditions in real estate, we would expect to see growth as these trends subside. The usual seasonality trends for the GovDeals and retail segments are expected, with retail beginning the uptick in the post-holiday returns activity. We therefore expect higher volume of retail returns yet combined with the current higher mix of lower value products in the short term from customer behavior in response to inflation and macroeconomic uncertainty. Our current GMV mix expectations are reflected in a slightly lower total of segment direct profit as a percent of total revenue in the short term, contributing to the overall profit guidance range from the upcoming fiscal second quarter. We currently anticipate our consolidated revenue as a percent of GMB in the mid to high 20% range in the short term, reflecting our mix of business and products sold. While the macroeconomic headwinds remain, we are looking to stay positioned for market share gains and stronger, longer-term growth to continued emphasis on sales and marketing and in our operations and technology investing. Management guidance for the second quarter of fiscal year 23 is as follows. We expect GMB to range from $260 million to $285 million. Gap net income is expected in the range of $1 million to $3.5 million with a corresponding gap diluted earnings per share ranging from 3 to 10 cents per share. We estimate non-GAAP adjusted EBITDA to range from $6.5 million to $9 million. Non-GAAP adjusted diluted earnings per share is estimated in the range of 9 to 16 cents per share. The GAAP and non-GAAP earnings per share guidance assumes that we have between 33.5 and 34 million Fully diluted weighted average shares outstanding for the second quarter of fiscal year 23. We will now take your questions.