Liquidity Services, Inc.

Welcome to the Liquidity Services Incorporated second quarter of fiscal year 2023 financial results conference call. My name is Therese, and I will 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 Engrick, Liquidity Services Chairman and Chief Executive Officer, and Jorge Salia, 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, May 4, 2023, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact the financial results as 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 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 Chairman and CEO, Bill Engrick.

Good morning and welcome to our Q2 earnings call. I'll review our Q2 performance and the progress of our business segments. And next, Jorge Celaya will provide more details on the quarter. We continue to deliver strong value for our customers and shareholders in Q2. as we expanded our market share while delivering adjusted EBITDA and EPS above our guidance range and GMV near the high end of our guidance range. Despite some persistent macro headwinds, we continue to expand the reach and relevance of our marketplaces with improving vehicle metrics and continued strong buyer demand. Our resilient business model continues to deliver strong free cash flow, and we have continued to repurchase shares as we see opportunity in our long-term prospects. Let's take a closer look at our individual segments. Our retail segment, GMV, grew 24% organically to $73.3 million, an all-time quarterly record driven by our flexible offerings reliability, and high level of service to customers. Direct profit growth was flat year over year as retail consumers have traded down to lower value merchandise to save money in an inflationary environment versus the prior year period. We continued to drive innovation in our retail segment to deliver value and convenience to our customers. In this regard, Liquidity Services was named the 2023 Innovation Solutions Partner Award winner by the Reverse Logistics Association for our automated sell-in-place solution, which uses technology that delivers our customers measurable improvements in efficiency and return on investment. This is just one example of how our culture of continuous improvement uniquely benefits customers of liquidity services. We've also continued to expand our direct-to-consumer channel by opening a second all-surplus deals location in Cincinnati, Ohio, giving consumers in this market access to exciting online auctions of unique or hard-to-find retail products at compelling values that can be picked up by the winning bidder from our new distribution center location. This direct-to-consumer channel has allowed us to deliver higher recovery to our sellers and expand our reach to a new set of buyers, resulting in a win-win outcome. Our gut field segment, GMB, decreased 7% year-over-year to $167.9 million, reflecting sharply lower results in our acquired bid-for-assets real estate marketplace versus the prior year period. due to a delay in the rollout of new contracts and lower mortgage and tax sales this year versus the prior year period. Excluding bid for assets, our core GovDeals GMV grew 7% organically. We continue to see long-term upside in the secular growth of online real estate sales in the government market as they increase participation, deliver superior value to homeowners and communities and are easier to administer versus in-person courthouse sales. We are currently piloting new government real estate programs in a number of regions in the United States, which will, in the end, drive long-term growth in our real estate vertical. Direct profit in our GovDeals segment grew at a higher 3% rate organically over the prior year period as we continue to deliver economies of scale in our core GovDeals marketplace, which has driven strong results for our sellers in a broad range of asset categories, helping us grow the number of new accounts and assets listed by double-digit percentages organically during Q2. Our CAG segment GMV grew 11% organically to $41.5 million, and direct profit grew 15% organically as we successfully executed numerous high-value transactions during the quarter for our clients across the globe. We remain the most trusted market maker for industrial capital assets with strong interest in several sectors, including biopharma, energy consumer packaged goods, and aerospace manufacturing. Conversion of leads to executed transactions has been slower than normal as many of our enterprise clients continue to assess their plans amidst changes in the global economic climate. Our CAG heavy equipment fleet category continues to make progress. growing signed contracts, new sellers, transacted opportunities, and net new revenue. Add a healthy clip. Recent wins include several national accounts with strong upside potential. Finally, our machinio segment continues to grow its revenue and direct profit in the load teams organically with enhanced lead traffic and more equipment categories, continued growth of our storefront product, and financing services with third parties. We believe our Maschino platform offers business customers cost savings and convenience that are superior to other solutions and are ideally suited to a recessionary environment. In conclusion, we are focused on executing multiple drivers to create value for our shareholders over time. We continue to make multi-year investments and growing our market share, technology platform, and brand awareness to deliver long-term growth. Our results will benefit from the normalization of supply chains and our leverage of the fixed investments we've made in operational capacity. Our capital efficient business with strong operating cash flow, $101 million in cash and zero financial debt provides us ample financial flexibility to execute our plans. In closing, we thank all of our team members across liquidity services for the 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. We completed the second quarter of fiscal year 2023 with $282.7 million in GMV, up 2% and $81.5 million in revenue up 19% from $276.9 million and $68.3 million in the same quarter last year respectively. Our results reinforce the power of our business model to drive cash flows. We generated $33 million from operating cash flows during the quarter. and used $9.8 million to reduce our net shares outstanding by repurchasing approximately 750,000 shares. We sold, sorry, we hold $101.2 million in cash, cash equivalents, and short-term investments. We have zero debt and $25 million of available borrowing capacity under our credit facilities. Specifically comparing segment results to this second quarter, to the same quarter last year, our GovDeals segment showed volume increases in its major categories, including vehicles, with the exception of foreclosed real estate, which was down versus last year, resulting in the overall GovDeals segment being down 7% on total GMB. GovDeals revenue was up 4% and up 3% on segment direct profit as the volume increases in key categories combined with pricing improvements benefited results. Our retail RCG segment was up 24% on GMV, setting a new quarterly GMV record, was up 28% on revenue, and flat on segment direct profit, reflecting lower direct profit margins arising from a mix of products where lower value purchase products and related sales prices were at a high volume coming off their seasonal peak post-holiday period. Our CAG segment was up 11% on GMV, 5% on revenue, and 15% on segment direct profit, led by its energy and heavy equipment categories. Machinio revenue was up 13%, but its segment direct profit was also up 13%. GAAP net income for this second quarter was $4.2 million, resulting in diluted GAAP earnings per share of 13 cents down from 35 cents in the same quarter last year as a result of the 25 cents per share non-recurring gain from the bid for assets earn out fair value adjustment last year. Non-GAAP adjusted EPS for this second quarter was 20 cents up from 17 cents in the same quarter last year. Non-GAAP adjusted EBITDA was $9.9 million, up from $9.2 million in the same quarter last year, partly reflecting the higher GMV in revenue, partially offset by product mix, operations costs, and sales expenses to support market share expansion and longer-term growth. Our expertise in diverse sectors, a strong buyer base across numerous asset categories, and global reach are continuing to provide advantages to our clients who navigate economic change and look to us for valuable solutions. Our fiscal third quarter 2023 for GMV range is forecast consistent with the same period last year, reflecting expected growth in all our segments except cup deals, which continues to face headwinds in its newer real estate category. Despite growth, in its more traditional key category. While RSTG will be coming off its fiscal second quarter seasonal peak, its segment direct profit margin as a percentage of revenue is expected to improve sequentially into the fiscal third quarter, driven by changes in the mix of products expected to be available for sale. The CAG segment is expected to deliver year-over-year growth led by heavy equipment industrial sales, and projects in EMEA, many of which have been delayed from prior quarters. We also currently anticipate our consolidated revenue as a percentage of GMV closer to the mid-20 percentage range, reflecting our mix of business, type of pricing model mix, and products sold. Our segment's direct profits range, in total, as a percentage of total revenue is anticipated to be similar to the same quarter last year. We anticipate continuing to invest in our business to position ourselves for long-term growth, including in sales and in technology initiatives. Management guidance for the third quarter of fiscal year 23 is as follows. We expect GMV to range from $300 million to $330 million GAAP net income is expected in the range of $3 million to $5.5 million, with the corresponding GAAP diluted earnings per share ranging from $0.09 to $0.16 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 $0.16 to $0.24 per share. The GAAP and non-GAAP EPS guidance assumes that we have 33.5 million fully diluted weighted average shares outstanding for the third quarter of fiscal year 2023.