Liquidity Services Inc (LQDT) Q1 2020 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2020 Liquidity Services Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Julie Davis, Senior Director of Investor Relations. Please go ahead, Ma’am.

Thank you, Sonya. Hello and welcome to our first quarter fiscal year 2020 financial results conference call. Joining us today are Bill Angrick, our Chairman and Chief Executive Officer and Jorge Celaya, our Executive Vice President and Chief Financial Officer. We will be available for questions after our prepared remarks. The following discussion or responses to your questions reflect management's views as of today February 6, 2020, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC, including our most recent Annual Report on Form 10-K. As you listen to today's call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. During this call, we will discuss certain non-GAAP financial measures. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. We also use certain supplemental operating data as a measure of certain components of operating performance, which we also believe is useful for management and investors. The supplemental operating data includes gross merchandise volume and should not be considered a substitute for or superior to GAAP results. At this time, I'd like to turn the presentation over to our CEO, Bill Angrick.

Thank you, Julie. Good morning and welcome to our Q1 earnings call. I'll review our Q1 performance and provide an update on key strategic initiatives. Next, Jorge Celaya will provide more details on the quarter and our outlook for Q2. During our first quarter, the majority of our business representing 77% of our total gross profit performed well, as our Retail Supply Chain Group, GovDeals, and Machinio segments expanded their share, while our Capital Assets Group performed below expectations. Our RSCG segment GMV grew 12% over the prior year period, marking our tenth consecutive second quarter of double-digit year-over-year GMV growth as we continue to deliver significant value to our retail and consumer goods manufacturers and buyers. Our core GovDeals segment GMV grew 5% and we signed over 300 new agency clients as we added market share in California, Minnesota, New York, Oregon, and Texas. Our Machinio segment revenue grew 85% over the prior year period as we continue to expand our data-driven solutions for the marketing and sale of industrial equipment, including machine tools, construction and agricultural equipment, commercial trucks, and biopharma assets. Our CAG segment GMV declined 36% versus the prior year period and was impacted by the wind-down of our DoD scrap contract and softness in our energy and industrial verticals in the Americas and Asia Pacific regions. We recognized the need to improve this area of our business and are working diligently to transform our go-to market offering in our CAG segment. We believe that the CAG segment will be the first to benefit from our new aggregated marketplace and the increasing availability of our self-directed solutions for commercial sellers. We're in the process of migrating more of our existing CAG sellers from our fully-managed solutions to our self-directed platform solutions and have had early positive responses as customers have greater control and flexibility over the timing of their sales, reduced costs, and access to the power of our 3.6 million registered buyers. We continue to have a strong sales pipeline within our CAG business that we expect to transact during the course of fiscal year 2020. Many of these assignments are multimillion sales events related to cross-border realignment activities of our clients, and these projects are more difficult to predict in the near term, which is reflected in our Q2 guidance. In support of our RISE strategy, which is focused on recovery maximization, increasing sales, service expansion, and expense leverage, we've activated the beta version of our new unified marketplace, which consolidates all asset listings from our CAG marketplaces, including NetworkIntl.com and Go-Dove.com. Buyers can now find and bid on all assets from our CAG industrial sellers in a single destination marketplace with a superior user experience. As we complete this marketplace consolidation, we anticipate gaining marketing and operational efficiencies that will enhance the value we deliver for sellers and buyers. These new capabilities will help us market and grow our solution as a platform for other players in the value chain of our industry verticals, who can grow their own businesses by affiliating with and using our platform and accessing our services and liquidity. We are excited by the opportunities to leverage the investments we've made in our marketing services, marketplace platform, data-driven intelligence tools, and domain expertise to grow asset-light services with recurring revenue characteristics in multiple verticals and multiple geographies. We anticipate improved growth through the remainder of fiscal year 2020 as a direct result of these investments. In summary, our investments during fiscal year 2020 will be guided by the following strategic objectives. One, driving higher net recovery through technology and innovation that improves the buyer and seller experience. Two, increasing volume by delivering flexible service offerings and pricing models in asset categories with attractive addressable markets. Three, growing services with recurring revenue characteristics that leverage our technology platform, domain expertise, data, and marketplace channels. And four, improving operating expense leverage by controlling costs and through technology and innovation that increases our productivity. I'll now turn it over to Jorge for more details on the quarter.

Thank you, Bill. First, I will comment on select first quarter of fiscal year 2020 results. We finished the first quarter of fiscal year 2020 within guidance range for all our metrics. As compared to the first quarter of fiscal year 2019, GMV and adjusted EBITDA were down on the lower volumes in our CAG segment, the impact of the wind-down of DoD scrap contract, and planned increases in sales and marketing expenses. Compared to the first quarter of fiscal year 2019, GMV declined 6% and revenue was down 8% including the impact of the wind-down of our DoD Scrap contract. The first quarter GAAP net loss increased 3%, and non-GAAP adjusted EBITDA resulted in a 29% year-over-year decline, again including the results from the DoD Scrap contract in the prior year. In the first quarter, we reported GMV of $148.6 million; GovDeals GMV was up 5% from the first quarter of fiscal year 2019 excluding the GMV from the Auction Deals self-directed marketplace last year. These commercial seller volumes in the Auction Deals marketplace are now included in the CAG segment this year. Retail Supply Chain Group GMV was up 12%, driven mainly by the expansion of the relationships with our current clients and diversification of our seller base. These improvements were partially offset by a 36% year-over-year decrease in our CAG segment impacted by the wind-down of our DoD Scrap contract and slower ramp-up of new business including activity in our industrial and energy verticals. Excluding the impact of the DoD Scrap contract, this CAG segment declined 30%. We reported first quarter of fiscal year 2020 revenue of $49.5 million. GovDeals revenue increased 5%, RSCG increased 8%, and our CAG segment increased 49% compared to the first quarter of fiscal year 2019 including again the wind-down of the DoD Scrap contract. Excluding the DoD contract, CAG segment revenue was down 31% compared to the same quarter last year. Normalizing for the change in auction deals compared to last year, GovDeals was up 6.5%. Our first quarter fiscal year 2020 GAAP net loss was $5.2 million compared to a loss of $5 million in the first quarter of fiscal year 2019. Adjusted net loss was $4.1 million, an increase in loss from $3.3 million last year. Finally, our first quarter adjusted EBITDA was negative $2.1 million, a decline from a loss in the same period last year of $1.7 million. These declines were impacted by the lower top-line activity in our CAG segment, including the wind-down of the DoD Scrap contract and a planned increase in sales and marketing expenses to support top-line growth going forward. We continue to have a debt-free balance sheet. At December 31, 2019, we had a cash and short-term investment balance of $49.2 million. In the first quarter, we incurred a $10.5 million increase in cash used in operations compared to the same quarter last year. The increase was mainly attributable to higher year-end compensation payments from improved financial performance in fiscal year 2019 compared to fiscal year 2018. Final payments of seller distributions associated with the completion of the DoD Scrap contract, a sales tax audit settlement, and a deposit for the purchase of assets in the industrial sector expected to be sold in the coming quarters. Our working capital accounts are subject to natural variations, depending on the timing of cash receipts and payments, and our fiscal year first quarter tends to be a seasonally low quarter. Other than the $5 million Machinio acquisition earn-out payment that will be paid in the second quarter of fiscal year 2020, we do not currently expect unusual changes in our working capital requirements in this upcoming fiscal year second quarter. Looking ahead to the second quarter of fiscal year 2020, our focus remains on growing our commercial and municipal government marketplaces, continued technology enhancements and higher adoption of our new unified marketplace, and increased adoption of our commercial self-directed solution. We expect that our GovDeals and RSCG segments will continue to grow top line GMV as we demonstrate the value we offer our sellers through higher recovery rates and flexible service models. We anticipate our CAG segment will be down from fiscal year 2019's second quarter. We also will begin to cross-list and cross-market auctions across our CAG legacy marketplaces and our new unified marketplace. We believe our Machinio segment will continue to grow as we expand our data-driven solutions from the marketing and sale of industrial and heavy equipment. We will continue to expand on our sales capabilities, new unified marketplace, data-driven marketing tools, and enhanced user experience. The management's guidance for the next fiscal quarter is as follows: we expect GMV for the second quarter of fiscal year 2020 to range from $145 million to $165 million. A GAAP net loss is expected for the second quarter of fiscal year 2020 in the range of a net negative $56.6 million to a negative $2.2 million, with a corresponding GAAP loss per share for the second quarter of fiscal year 2020, ranging from negative $0.17 to a negative $0.07 per share. We estimate non-GAAP adjusted EBITDA for the second quarter of fiscal year 2020 to range from a negative $2.5 million to a positive $500,000. A non-GAAP adjusted loss per share is estimated for the second quarter of fiscal year 2020 in the range of negative $0.13 to a negative $0.04. This guidance assumes that we have diluted weighted average shares outstanding for the quarter of approximately 33.8 million shares. Thank you and we will now take any questions.

Our first question comes from Colin Sebastian of Baird. Your line is now open.

Well, thank you. First off, Bill, with the expectation for a return to sequential and year-over-year growth in GMV through the year, can you talk about the key factors driving that improvement? And I guess, part of the same question, I guess, regarding the slowdown in capital assets. How much visibility do you have into when this stabilizes in the sense, how important is the self-directed offering as part of that?

The business tends to see seasonal growth during the March and June periods. We have shown that the retail segment has consistently performed well, achieving ten consecutive quarters of double-digit GMV growth. The macroeconomic outlook appears positive for this segment to keep doing well, gaining market share, and benefiting from the shift towards online retail. In terms of the GovDeals business, we had another strong quarter of market share growth, adding over 300 new agency accounts. We have made improvements to our sales and account management teams and strategies, reallocating resources to enhance coverage in existing territories. This business started in the southeast and is now expanding up the East Coast and the Midwest, regions rich in opportunities for increasing GMV from established areas. Additionally, we have boosted our capacity to grow in larger metropolitan areas in the Western United States and Canada, as evidenced by our recent expansion efforts. Notably, we partnered with Caltrans in California, a significant transportation network that manages many high-value assets, and we are growing our presence in New York, Oregon, and Texas, all of which offer great potential for managing equipment and increasing GMV in our marketplace. We are also enhancing our buyer-facing merchandising capabilities and encouraging higher participation in our marketplaces by providing a better mobile experience. Currently, 40% to 50% of mobile traffic, depending on the marketplace, is coming through a more user-friendly mobile interface, which should further enhance growth in our GovDeals segment. CAG has experienced variable project cycles with unpredictable timing. We are observing many realignment activities due to cross-border tariffs and trade, often involving large, complex projects. We have a good view of upcoming auctions approximately 30 to 45 days out, but longer-term predictions are more challenging. The coronavirus situation in Asia complicates matters, affecting assets within China and potentially hindering buyers' willingness to travel and engage in business. We need to keep monitoring this situation. Despite this, we have a robust sales pipeline for CAG for the full year. When significant projects come through, they tend to be impactful, and visibility around these can become less clear in the current or upcoming quarters. Our broader strategy of achieving economies of scale through a unified marketplace is attracting more self-directed business. This self-directed tool keeps assets in place, allowing clients, particularly those who have not previously used our auction services, to manage the entire sales process independently. They can determine the timing and method of sale, whether through an internet auction without reserve, one with a reserve, a make an offer option, or a fixed price. This empowers sellers to bring more of their volume to our platform. Previously, this volume may have bypassed us, as clients negotiated sales directly with their buyers. We believe this strategy will capture market segments we have not traditionally reached with some of our legacy clients, where we used to manage all their sales. Many clients are interested in leveraging our buyer base and are inclined towards more self-management, which we reward with competitive commission rates. This reciprocal value exchange is expected to further drive growth in our commercial capital asset clients and market share, ultimately reflecting in GMV.

So just to clarify that. Now the self-directed are those typically incremental new clients? Or is there a conversion from existing client base to the self-directed effort?

It is both. It is both. And we had examples of clients who would typically wait to do a few large sales with us each year and handle everything else on their own through their own dealer network or buyer network; those sellers are now looking at our marketplace using our self-directed tool, uploading their own equipment on a more regular basis. So the strategy is helping us create more recurring flow from many of these clients that have traditionally been fully managed service, where we would go into their place of business and do the work for them. So that's the current client base. And that transition's underway, and it will be a gradual transformation as we evangelize what we're doing and showcase those examples. We had a client load assets on their own in the UK and complete a successful sale within like five or seven business days. So that type of activity is very exciting for us because it's showing the scale of the platform in a different geography with a traditional client who wouldn't have thought of us as a global self-directed platform. So in many ways, think of us as an eBay for business-to-business with respect to self-directed. Although we provide buyer-facing customer service, we collect the money, we route out and prevent fraud, a lot of high-touch services on the buyer side to protect the self-directed sellers. With regard to new business, we see some green shoots in the construction vertical and the commercial transportation vertical; we sold a significant volume of construction equipment for our government sellers. And it's a natural and complementary area for us to bring more commercial volume onto the platform. So I think as we move through the year, Colin, you'll see updates on how successful we are with the new clients using our self-directed tool in some of these high-value categories like construction equipment, agricultural equipment, and commercial transportation, your light-duty trucks and heavy-duty trucks because we have a very strong set of buyers for those categories today.

Okay. And then, I think there's a comment around headcount and hiring. So I guess, I'm curious how much of that have you already accomplished? And I guess, related to that, as you benefit from some of these revenue tailwinds through the year and thinking about potential for incremental profitability, are those additional costs going to be layered against what you have? And – or should we be thinking of that step-up as progressing through the year? Thanks.

I think the progression will continue through the June quarter. Our guidance and focus as a business is to leverage all the things we talked about and achieve profitability as we exit fiscal 2020, which is September 30 quarter. So we're very acutely aware of driving ROI on additional investment in the sales function, sales process, and marketing automation. I mean, really, this is about covering opportunity with the appropriate resources from a sales perspective. We're creating economies of scale through the unification of our marketplace. And the sales organization, we have a Chief Commercial Officer driving that process. And on the marketing technology stack, I think that's another important area of investment for us that's underway and continues through the June quarter. And that is driving more automation, more machine matching of supply with the buyer base. As we get more maturity in those areas, I think, ultimately, we drive efficiencies and have profitability as a very important focus and goal for us as we exit fiscal 2020.

Okay. And then last for me. The unified marketplace, what's the time frame there with respect to the beta? And anything – any key learnings worth pointing out and how are you thinking about potential churn rates as legacy capitalize up buyers and sellers move over to the new site?

Sure. Well, I think it's a logical place for the business, as it's evolving too. We have, in terms of insights, there is over 80% overlap between our GovDeals asset categories and the type of equipment that's coming through the industrial clients. And with such a high degree of overlap, there are obviously economies of scale of housing that in a single tech platform with a single user experience. So we believe that on the buyer side, there'll be a significant, not like retention but opportunity to continue to grow and cross-fertilize more equipment and more inventory among the buyer base by having that in a much improved indexable filtering navigation system and recommendation engine type of experience. And for us, it's an obvious lift in terms of recovery rate opportunity selling items for even more money, allowing buyers to quickly engage with the supply in the marketplace through a better mobile experience and better desktop experience. And so we think that there's going to be an opportunity to further penetrate the buyer base by bringing that value. On the seller side, we have organized migration in a manner that is fairly seamless for the seller community. They're continuing to use the same login tools with the same relationship managers. So it's really about continuing to find ways to solve their needs, penetrate the available supply, and give them analytics support. I think one of the areas that we continue to invest in and we believe will be highly valued is more of the marketing analytics around what's happening, not only in our marketplace but broadly in the industry verticals we serve. And with our investment in Machinio, we have a much broader perspective on entire industry categories, whether it be construction, agriculture, or biopharma equipment. And so we're very upbeat about how we're going to be able to package and provide industry analytics on what assets are worth, what the cycle time to sell an asset is, and allow these sellers and buyers to have insight-driven reports and tools that will improve our engagement with these customers and further propel the type of volume that we can do.

Okay, thank you very much.

Thank you. And this does conclude our question-and-answer session. I would now like to turn the call back over to Julie Davis for any closing remarks.

Thank you for joining our call today. If you have additional questions, please feel free to reach out. This now concludes our call. Thank you, and have a nice afternoon.

Well, ladies and gentlemen, thank you for participating. You may now disconnect.