2/2/2023

speaker
Operator

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.

speaker
Gigi

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.

speaker
Jorge Celaya

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.

speaker
Operator

Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1-1 on your touchtone phone. If you wish to be removed from the queue, please press star, 1-1 again. If you are 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 star 1-1 on your touchtone phone. One moment for our first question. Our first question comes from the line of George Sutton from Craig Hallam.

speaker
George Sutton

Thank you. Bill, I wondered if you could explain in a little bit more detail what you believe will be the normalization and the boost that you see for the business later in the year. What are the drivers for that that you see?

speaker
Gigi

I think those relate to fleet, supply, reaching what I would call backlog demand in the government market and to some extent in the commercial market. We know that There is budget and intent to buy a variety of operational assets across our government and enterprise customers. Describe that as vehicle fleets, truck fleets, life safety, electronic parts and other components have limited that supply. So as that refresh unfolds, you know, the Owned assets will make their way through our asset disposition cycle and that will help normalize what we think has been a longer hold period for many of our clients. I think that also affects certain other segments such as the construction market, utility bucket truck market, other things that would normally feed into our marketplace. I think the real estate business has had aberrationally low conversion rates. Some of that has related to public policy by certain cities and jurisdictions and counties on delaying the normal sale of judicial and tax lien real estate. And I think perhaps that's going to normalize, you know, as we look at how borrower behavior changes with higher interest rates. I think you're going to see a reversion of a lot of, you know, what we've seen is below average sales to average sales. And if that snaps back, we'll have more real estate sales. Well, what are we doing to backfill that shortfall, which is frankly, as I mentioned, cost us, you know, 10 to, at the low end, 10 to the high end, 30 million of quarterly GMB and a few million dollars of EBITDA. We're backfilling it with new markets and diversification and market share growth. I mean, we're making great progress with the heavy equipment fleet of business and commercial markets. National leasing companies are now looking at our marketplace as a viable solution. We continue to expand our CAG reach. And as I said, 50% growth in inbound leads is pretty good. These are Fortune 1000 companies with intent And it's a question of the exact timing of that. So we like to see that on a sustained basis as a temperature of where we can take that business. And I think the global market making is very relevant as you have different pockets of demand for different assets and we can create that marketplace like no one else to generate liquidity. We continue to block and tackle in our core retail segment. 20% plus GMB growth is not too shabby. Yes, consumers have traded down and they're not buying, you know, the, you know, uber high-end furniture and fitness equipment that they did in, you know, the prior year period. But there's still a lot of utilization of our services and, you know, we are gaining market share there. And I think across all of our segments, we have stronger relative strength than, you know, other service providers. And so, if we continue to expand the market share, I think we'll overcome the short-term headwind that has dogged GMB in the last quarter that we're announcing today.

speaker
George Sutton

You mentioned in the CAG group your inbound leads up pretty significantly, but by the same token, your conversion of those leads slower. Can you give us some sense of what you are doing to improve that conversion and what sort of timeframe would we anticipate to see some improvement?

speaker
Gigi

Well, I think... what we're doing is making sure that we provide flexible services, real-time data to allow our clients to see what value they can achieve in the marketplace. A lot of these are multimillion dollar transactions and may affect facilities and clients' decisions to stay in a market or exit a market. So a lot of that is CFO and operational decision-making on what is the strategy of the company selling the asset? And, you know, when you have cross currents in the market, like we haven't seen in a while, that's delayed decision-making. And frankly, that's outside of our control. But what we can do is cement our role as the, you know, trusted solution of choice to make the market when they're ready. You know, take the Semicon market. Semiconductor manufacturing has been roiled. You know, there's a lot of movement, you know, reshoring activity, and that's an opportunity for us. And so we're covering that really well, a lot of inbound leads. And then when you actually think about selling, you know, manufacturing lines, you know, those are very profound decisions by these companies. So what we want to be doing, like a lot of advisory businesses, is we're in the boardroom making, you know, that data available, precedent transactions so clients understand what they can realize in the secondary market. And so it's not a question of whether these transactions will happen, just a matter of when. And of course, George, as an auction marketplace, we give you the real-time guides we have at a point in time. We're earlier in the quarter, so we can only tell you what we can see and have visibility around. But as I look at 2023 and 2024, The fact that we're able to increase awareness, increase the new business development pipeline gives us, you know, really strong conviction that, you know, we have a growth business on our hands in the CAG segment. And, you know, that's the best I can give you now.

speaker
George Sutton

One final question for me relative to Machinio. It's kind of an optical little superstar but very small. you're building a lot of functionality in, and certainly with the number of participants looks like it could be a much bigger business. Can you just discuss, you know, you're effectively an overcapitalized business today. Has there been real discussion on, on trying to grow that business fairly dramatically?

speaker
Gigi

We have a very good team and plan to double the machinery of business in the next two to three years. And, and, and, you know, that, That's always gonna be a good growth trajectory. While it may be small relative to the whole, we've more than doubled it since we began investing in Maschineo and see a glide path to continue to build that business. That's a business that has global reach. We have opened an office in China. We see the broker dealer market for equipment categories is very, inefficient there. We think that has opportunity for us. We see opportunities to play the role of a market maker and introduce transactions to the advertising platform because we have a number of buyers. We average four or five unique bidders for every asset that we sell. That means there's one successful bidder and four unhappy bidders that told us exactly what they were interested in and have financial capability to perform. So matching that buyer demand from our auction platform with available inventory and machine is a natural adjacency that we're beginning to attack. In addition, a lot of our buyers do need equipment financing. And so we are standing up initially partnerships to reduce friction and get those financing needs met. And, you know, that could be a prelude to doing something more there. we've had the ability to improve the tech platform to allow people to list directly on Maschineo without really any interaction from our team, which is a positive. So there are a lot of drivers that will allow Maschineo to double again. And this is a rule of 40 high margin business. So even though its revenue might be lower relative to the whole, it's a high margin business. So as we get you know, traction there and double that business, I think it starts to become material to the overall bottom line of the company.

speaker
George Sutton

Perfect. Thank you.

speaker
Operator

Thank you. One moment for our next question. Our next question comes from the line of Gary Prestofino from Barrington Research.

speaker
Gary Prestofino

Hey, good morning, Bill and Jorge. Bill, couple of questions here. I would assume that the issue with gov deals on the on the vehicle side is really more supply issue. I mean, you did mention pricing a little bit, but it really stems from the fact that there's a lack of supply out there. Because there was a lack of new car billed last year, and the fleets couldn't refleet. Is that kind of a correct assumption?

speaker
Gigi

That's, Gary, you're spot on, because when you think about it, the dealers, their highest margin is taking whatever supplies available and selling it retail. The last demand to get fulfilled is the fleet buyer. And you see that in the rental market, too. So we know that we're sort of last in line to, at least our customers, I should say, are last in line to get their needs fulfilled. But there's just a ton of money that's been approved and allotted for more efficient bus fleets. fire medical, police, you know, energy utility fleets that, you know, is waiting patiently to get their needs fulfilled. And, you know, the industry is working hard, you know, increasing chip supply capacity to fill component needs in the automotive supply chain. And I think that ultimately is going to bear out in the second half of 2023, 2024. And we'll be there and we'll have a lot of supply that's freed up to come into the marketplace. So that's how we see it. That's the data that we observe and track, like you all probably in different sectors with different service providers. So we know that that is a headwind that will normalize and eventually become a tailwind.

speaker
Gary Prestofino

Yeah, all right. Is it your opinion that or the knowledge base here that these local, municipal governments, state governments, whatever, they're not going to be as sensitive to price and interest rates. If they have the money allocated on a budget basis, they're going to buy the cars if the cars are available. That's kind of a correct assumption.

speaker
Gigi

Having worked with government entities for over 22 years, I can tell you the use it or lose it mentality has always been there.

speaker
Gary Prestofino

Okay, great. A couple more questions here. Maybe could you go into a little bit more detail detail on what's going on the gov deals on the real estate side there should be given the environment i don't know if you're dealing with repossessions or whatever there should be more real estate out there to sell but you're saying the conversions are coming down so so what happens to that real estate if the conversions come down so when uh the taxing event takes place the

speaker
Gigi

owner has the ability to recover the property if they pay their back due mortgage or tax payments. And so we've seen a lower than normal rate of, you know, going through to final sale as some borrowers and some entities have subsidized borrowers to get those properties off of their delinquency rolls. We don't see that as sustainable. You know, there's a lot of let's say support and subsidization happening in 2021 and 2022 lot of relief programs that sort of kind of held up that market probably artificially, you know, and that's part of a larger effort to put a lot of payments on hold. Institute loan debt was another example where you had deferrals and so forth. I think that all comes to normalize in 2023, because those aren't sustainable policy decisions. I think at some point you go back to sort of your normal cycle of meeting your obligations. And that means that instead of a 0.1% rate of assets going through the foreclosure process, they'll probably normalize to more like 2%. And so what does that mean for us? items that were queued up for sale, that were listed in the marketplace, instead of closing at auction, they've been pulled. Well, I think more of those assets will go through to completion and will be sold. And that will affect positively our GMV. And it's not like we have, we're not rooting for one side or the other. We're improving, you know, the longitudinal data that says, you know, if you have 100 properties in a county, every quarter that go to the sale process as directed by the sheriff, when you normalize that, we're going to sell a lot more property than what we've seen in the last few quarters and what we currently have visibility on for our Q2 March quarter. The other thing I would say is I think interest rates have had some you know, impact on whether these borrowers are willing to carry the property, you know, interest rate payments are much higher now. And, you know, there's a couple of pieces in the journal this week around, you know, the fact that consumers are feeling a little bit of the squeeze. So we think that's probably going to influence more real estate sales. Lastly, you know, the broader secular trend and mission of liquidity services is to drive digital adoption of online sales methods by government entities, and that includes the counties that administer these sales. And we have been successful in winning new contracts. And in some cases, those contracts have just taken a little bit of a bureaucratic, slow rollout phenomena. And, you know, to some extent, people may resist change. you know, these sales have occurred in an offline way for a hundred years and you're moving to online and certain people, you know, a local buyer might say, no, I don't want that competition. I'm going to call my local mayor or city council and say, you know, this isn't good. And so then, you know, there's a little bit of a lobbying process that goes on and delays rollouts, but we've won some top 50 Metro, uh, contracts that have not, uh, bared any fruit for us in the current year because of that type of a political process. Now, that's going to go through and ultimately be operationalized and we will have the benefit of those awards because these are competitive contracts and the data is on the side of the decision to go online. But that's just part of what you deal with when you're pioneering a market. is dealing with significant change, and that sometimes makes certain incumbents resist.

speaker
Gary Prestofino

Okay, thank you. Then just two more quick questions. Number one, it looks like the cash was down fairly substantially, sequentially. I know you bought back some stock, but what accounts for the rest of that cash balance going down, Jorge?

speaker
Jorge Celaya

So we did have... a little timing difference at the very, very end of the quarter on our financial settlements with customers, where we normally would have had that happen in the last few days of December. But with the holidays and, frankly, with a change in our banking, it just is falling into January. So that's actually a part of it that you don't see, but it also explains on the balance sheet why some of the payables to customers ended up, you know, the net ended up a little different. And then, yes, and then there's the buyback, right, which is, you know, $7.5 million or $7 whatever, right? So those are the two biggest things I'd say.

speaker
Gary Prestofino

Nothing otherwise unusual. Okay. And then lastly, it looks like your G&A expense was down about 10%. I would assume that that is something dealing with the reversal of accruals for bonuses, something like that. And is that correct? And is... That $7.4 to $8 million, is that a good number for a run rate throughout the rest of the year if the EBITDA generation continues to be where it was in Q1 in that range?

speaker
Jorge Celaya

So for the first part, no, there's nothing unusual in bonus accruals or anything. So, you know, there's – I think on just the G&A in general, it's – you know, well-managed DNA. And I would expect, you know, the rest of the year to be similar. I think even our tech and ops would be quite similar to this first fiscal quarter. You know, it all goes up a little bit as you go, right? But the only thing that will dollar-wise go up more than the others but still be steady on a year-over-year percentage growth is, you know, the more variable sales and marketing.

speaker
Gigi

Okay.

speaker
Gary Prestofino

Thank you very much.

speaker
Operator

Thank you. Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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