Liquidity Services, Inc.

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 Ingrid, Liquidity Services Chairman and Chief Executive Officer, and Jorge Salea, 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 view as of today, August 3, 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 matrix 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 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 as a substitute for or superior to GAAP results. At this time, I will turn the presentation over to Liquidity Services Chairman and CEO, Bill Ingrid.

Good morning and welcome to our Q3 earnings call. I'll review our Q3 performance and the progress of our business segments. And next, Jorge will provide more details on the quarter. We achieved record GMV during the quarter, driven by a strong execution for our clients, and market share gains from our investments in sales and marketing. Our outstanding participation from our 5.1 million registered buyers and flexible service offerings continue to attract more sellers and drive better seller recovery, which in turn powers our growth. Together, this allowed us to deliver financial results above our guidance range on both the top and bottom line. Notably, our adjusted earnings per share grew at an impressive 33% year over year. Despite some persistent headwinds in our bid for assets real estate vertical, 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, GMB, grew 20% organically to $72.7 million driven by our flexible offerings, reliability, and high level of service to customers, which has allowed us to expand our market share. Direct profit grew 12% year over year as we continue to drive innovation in our retail segment to deliver value and convenience to our customers. In particular, we continue to expand our all surplus deals channel, giving consumers 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 selected distribution center locations. We plan to continue to expand this channel to unlock a $100 million GMV growth opportunity over the next few years. Our GovDeal segment GMV decreased 4% year-over-year to $213 million, reflecting lower results in our acquired bid for assets real estate marketplace versus the prior year period due to the delay in the rollout of new contracts. and lower mortgage and tax foreclosure sales, which are at a multi-year low. Excluding VIT for Assets, our GovDeal CMV grew 5% 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 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, including Oklahoma, Louisiana, Pennsylvania, and Florida, which will drive long-term growth in our real estate vertical. Direct profit in our core GovDeals marketplace grew at a higher 9% rate organically over the prior year period as we continue to drive economies of scale in our core GovDeals marketplace, which has delivered 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 Q3. Recent notable wins include Baltimore County Maryland Fleet Minneapolis, Minnesota fleet, and St. Louis, Obispo County, California. Near-term priorities in our GovDeals business include the release of our next generation marketplace, which will enhance the buyer experience with improved search, navigation, and bidding, which in turn will improve recovery rates realized by our sellers. We will also continue to expand and improve our fleet business with the addition of value-added services to improve the quality of asset listings and management of client logistics needs. Our CAG segment GMV grew 14% organically to $48.2 million and direct profit grew by 27% organically year-over-year in the quarter as we successfully executed numerous high-value transactions for our clients across the globe. We remain the most trusted market maker for industrial capital assets and have a strong pipeline in our biopharma, energy, consumer packaged goods, semiconductor, and aerospace manufacturing verticals. Our CAG heavy equipment fleet category grew GMB more than 30% organically during the quarter and 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 direct profit in the mid-teens organically with enhanced lead traffic and more equipment categories, continued growth of our storefront product and financing services with third parties. We continue to invest in the expansion of our Machinio business and believe our Machinio platform offers customers cost savings and convenience that are superior to other solutions. In conclusion, we are focused on executing multiple drivers to create value for our shareholders over time. we continue to make multi-year investments in growing our market share, enhancing our tech platform, and expanding our brand awareness to drive long-term growth. Our results will benefit from the continued 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, approximately $106 million in cash with zero financial debt, provide us with ample financial flexibility to execute our plans. In closing, we thank 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 turn it over to Jorge for more details on the quarter.

Good morning. For the fiscal third quarter, GMB set a new record of $334 million, and revenue grew 16% year-over-year, with our retail segment sustaining strong volume following its traditional fiscal second quarter seasonal peak. Our flexible service offerings continue to drive additional access to recurring flows of merchandise through new and expanded seller programs. In addition, our GovDeal segment's traditional fiscal third quarter seasonal peak included record participant activity on our govdeals.com marketplace and improved availability of vehicles for sale, while low U.S. real estate foreclosure levels and delayed initiation of real estate government auctions partly offset our core GovDeals gains. Our consolidated results included GAAP EPS of 21 cents, non-GAAP adjusted EPS of 28 cents, and non-GAAP adjusted EBITDA of $13.3 million, tying our highest quarter results in nine years. Our ratios of revenue to GMV and adjusted EBITDA to the total of our segment's direct profits were 24% and 56% respectively, as indicated in our prior guidance. Our adjusted EBITDA grew faster than our total direct profit as we achieved 40% for our Rule of 40 this third quarter, reflective of the potential of our business model. We generated $10 million in cash flows from operations during the quarter and used $4.2 million to repurchase 325,000 shares. We ended the quarter with $105.9 million in cash, cash equivalents, and short-term investments. We have zero debt and $25 million of available borrowing capacity under our credit facility. recapping and comparing segments' results from this third quarter to the same quarter last year. Our retail RSCG segment was up 20% on GMB, up 20% on revenue, and up 12% on segment direct profit, reflecting an increase in recurring product flows from new and expanding client programs and improving recovery rates due to reduced availability of excess inventory in the broader market that had accumulated Forum retailer supply chain challenges last year. An increased mix of purchase model transactions drove a lower year-over-year segment direct profit margin as a percent of revenue, despite improved recovery rates sequentially. Our CAG segment was up 14 percent on GMV, 15 percent on revenue, and 27 percent on Segment direct profit led by its industrial and heavy equipment categories and strong recovery on purchase transactions. Machinio revenue was up 14% and its segment direct profit was also up 14% reflecting continued increase in subscriptions. Despite the record marketplace activity for personal property across our legacy GovDeals business and GovDeals.com marketplace, including improved availability of vehicles. Our GovDeals segment was down 4%, reflecting a lower volume of real estate properties made available for auction, with longer time in converting prospects to online auctions and the new prospects releasing property volumes for auctions. Revenue and direct profit for the GovDeals segment were each up 4% as the volumes increased in key categories combined with pricing improvements. As a reminder, bid for assets real estate transactions are lower take rates than traditional GovDeals due to the large GMV per transaction and has the resulting effect of a lower revenue to GMV ratio, yet similar direct profit margin on revenue. GAAP net income for the third quarter was $6.5 million resulting in the diluted GAAP earnings per share of 21 cents and compared to 50 cents per share last year, which reflected the 35 cent gain from the bid for assets earn out fair value adjustment last year. Non-GAAP adjusted EPS for the third quarter was 28 cents up from 21 cents in the same quarter last year. Non-GAAP adjusted EBITDA of $13.3 million this quarter was up from $11.9 million in the same quarter last year, reflecting our growth initiatives partially offset by year-over-year increases in sales, marketing, technology, and operations expenses to support market share expansion, diversification, and marketplace enhancements. Our fiscal fourth quarter 2023 guidance range is expected to be above last year for GMV and adjusted EPS, and consistent with last year for adjusted EBITDA. Our fiscal fourth quarter outlook for GMV follows our seasonal high fiscal third quarter for GovDeals and the strong retail third quarter. We currently anticipate our fourth quarter consolidated revenue as a percent of GMV to continue in the mid-20% range, reflecting our mix of business and expected products sold, with our segment's direct profits in total as a percent of revenue in a range similar to our recent direct margin percent and slightly up over the same quarter last year. We anticipate continuing to invest in our sales and technology initiatives in support of our marketplace enhancements and long-term growth. Based on our current fourth quarter guidance, our total year fiscal 2023 is expected to achieve a record annual GMV and the highest annual adjusted EBITDA in nine years. Management guidance for the fourth quarter of fiscal year 2023 is as follows. We expect GMV to range from $290 million to $315 million. GAAP net income is expected in the range of $4 million to $6.5 million with a corresponding GAAP diluted earnings per share ranging from 13 cents to 20 cents 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 19 cents to 27 cents per share. The GAAP and non-GAAP EPS guidance assumes that we have 32 million fully diluted weighted average shares outstanding for the fourth quarter of fiscal year 2023. Thank you, and we will now take your questions.