Liquidity Services Inc Q4 FY2022 Earnings Call

Welcome to the Liquidity Services, Inc. Fourth Quarter of Fiscal Year 2022 Financial Results Conference Call. My name is Carmen and I will be your host 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 view as of today, December 8, 2022 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 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. The 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' CEO, Bill Angrick.

Good morning, and welcome to our Q4 earnings call. I'll review our Q4 performance and the progress of our business, and next, Jorge will provide more details on the quarter. We delivered strong EPS and adjusted EBITDA results during the quarter despite macro challenges, which limited the supply of vehicles in our marketplace. This performance reflects our efficient business model and diversified client portfolio. During Q4, the strength of our buyer liquidity and a recessionary environment was on display as the number of auction participants and registered buyers on our platform grew 34% and 24% year-over-year, respectively. For the full year fiscal 2022, we generated a record number of auction participants and completed transactions on our platform, which provided outstanding results for our sellers. We estimate that the lack of vehicles for our customers' fleet replacement cycles reduced our GMV by $10 million during the quarter. This, combined with abnormally low conversion rates on share of sales in our government real estate vertical, resulted in lower than expected GMV during Q4. While these are currently headwinds, we expect these trends to normalize and boost our business as we move through 2023. For our full fiscal year 2022, we're proud of the focus and execution of our team. We continue to advance our strategic and operational objectives, which translated into a record $1.1 billion of GMV, up 29% over the prior year, GAAP net income of $40.3 million and $42.7 million non-GAAP adjusted EBITDA. We also grew our registered buyer base to a record 4.9 million reflecting strong interest in our circular economy platform during this inflationary environment. As we commence fiscal year 2023, we remain focused on expanding our mindshare and position with commercial and government clients as the most trusted marketplace to manage value and sell surplus assets in the circular economy. Despite near-term headwinds in vehicle supply, we have a strong business pipeline and continue to see opportunities to reach $1.5 billion in annualized GMV and expand our technology-enabled asset-light services to drive long-term shareholder value. Our expertise in diverse sectors, strong buyer base across numerous asset categories and global reach are continuing to provide advantages for our clients as they navigate this current volatile macro environment. Let's take a closer look at the progress of each of our segments and how we are driving market share expansion. Our GovDeals segment is making excellent progress in expanding the growth in activity of customers on its marketplace. We continue to grow the number of new accounts and number of assets sold in the mid to high-single digit percentages each quarter despite the current headwinds of lower vehicle supply. In fact, we set new records for these metrics during Q4. Additionally, we continue to make progress penetrating our GovDeals customer relationships as a one-stop solution for all asset sales, including their highest value assets. For example, since fiscal '20, our GMV per seller and a number of assets sold per seller on GovDeals have grown 44% and 19%, respectively. We're also committed to the relentless improvement of our platform and we'll be launching the next generation of our GovDeals marketplace in 2023. The beta version of our new GovDeals marketplace was shared with select bidders in Q4 and was extremely well received, resulting in a 2 times increase in our customer net promoter score. This bodes well for the future, and we expect our modernized GovDeals platform and introduction of more data-driven features will increase our recovery rates and lift GovDeals' GMV materially over time. As client vehicle replenishment 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 as customers utilize both self-directed and fully managed solutions, leveraging our distribution center network to reduce supply chain costs and the sale of returns and shelf-pulled goods. While some clients have held onto returned inventory to offer customers compelling early holiday deals, we have a strong new business pipeline and have won several new programs in the big box, omnichannel, and pharmacy sectors, which has continued to diversify and grow our business portfolio in the Retail segment. Our Retail segment has a large market opportunity driven by strong secular growth in the volume of return merchandise as customers continue to embrace online retail. For example, according to the National Retail Federation, retailers expect about 18% or $158 billion of merchandise sold during the holiday shopping season to be returned. Our value-added services, in particular, have been highly prized by our Retail segment customers as they help our clients reduce their supply chain costs. Current results reflect that we are still early on and fully leveraging the investments we have made in three new distribution center facilities. We expect retail segment margins to improve as we further leverage this added operational capacity and drive productivity gains. Our CAG segment continues to play the role of a trusted global market maker for high-value equipment in the industrial supply chain. Our ability to support cross-border transactions and financial settlements among counterparties has been increasingly valued given the broad application and demand for the industrial assets we sell. For example, in a recent auction for biopharma assets in Europe for multiple Fortune 500 clients, we had over 100 bidders from 27 countries, including 17 bidders from China, where 60% of the assets were ultimately sold. Our global reach was critical to getting our sellers the best execution. Indeed, our CAG solutions are well positioned to help industrial companies who are in a cost savings mode, manage through the current recessionary environment. We anticipate growth in the energy, biopharma, and automotive verticals, in particular, and we have landed new mandates with major companies in these areas. As COVID restrictions loosen in China, we have attractive growth opportunities in the APAC region, which have been limited recently. Finally, our CAG heavy equipment fleet category has strong upside potential. We grew our consignment heavy equipment vertical 36% year-over-year in fiscal 2022 and finished the year ahead of plan for signed contracts, new sellers, transacted opportunities, and net new revenue. Finally, our Machinio segment continues to scale nicely with expanded coverage in more equipment categories and related services such as financing. We believe our Machinio digital advertising and storefronts solution offers business customers cost savings and convenience that are well suited to a recessionary environment. We have recently launched a self-directed auction for smaller dealer customers to list their equipment directly on the Machinio marketplace and we're also offering transaction-based services to Machinio customers to unlock valuable liquidity for sellers. Finally, we've opened a new Machinio sales office in China and believe there is a significant growth opportunity for our Machinio classifieds marketplace and storefront platform in the China market over time. In conclusion, we are focused on executing multiple drivers to create value for our shareholders over time. We've continued to enhance our brand awareness 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've made in sales, branding and marketing, technology, and operational capacity. Moreover, our capital-efficient business with a strong operating cash flow, $98 million in cash and zero debt, provides us with ample flexibility to execute our plans. We've increased our authorized share repurchase capacity to $15 million and 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.

Good morning. We completed the fourth quarter of fiscal year 2022 with $283.3 million in GMV, which was up 16% from $244.4 million in the same quarter last year. Revenue for this fiscal fourth quarter was $75.2 million, up 7% from $70.3 million in the same quarter last year and includes the completion of a high purchase transaction volume by our CAG segment. As a reminder, for our business model trend, higher growth of consignment, including growth in the real estate sector, will lower our ratio of revenue as a percent of GMV and cause revenue to grow at a slower rate than GMV. This trend can be impacted in the reverse in any period where higher purchase transactions occur. Specifically comparing segment results for this fourth quarter to the same quarter last year, our GovDeals segment was up 20% on GMV and 8% on revenue, including Bid4Assets. Our Retail RSCG segment was up 10% on GMV and up 6% on revenue. And our CAG segment was up 13% on GMV and up 6% on revenue, reflecting an increase in sales conducted with partner organizations that are fully reflected in GMV. Machinio revenue was up 18%. GAAP net income for this fourth quarter was $8.3 million resulting in diluted GAAP earnings per share of $0.25. This includes a $4.5 million, or $0.14 per share non-cash gain from the reduction in fair value of the Bid4Assets earn-out liability as the expectation of the timing of real estate asset flows continued to shift outside of the earn-out period. Non-GAAP adjusted EPS for the fourth quarter was $0.19, including approximately $0.03 of unfavorable impact to tax expense in the quarter for estimates of stock-based and other variable compensation. The total year 2022 effective tax rate was 15% on GAAP net income reflecting the non-taxable earn-out gain and 32% for adjusted net income. Non-GAAP adjusted EBITDA was $12.3 million, up from the same quarter last year, primarily due to the higher revenue and reduced variable compensation expense versus the fourth quarter of last year to close out fiscal year 2022. This was partly offset by a lower average segment gross profit margin in CAG on its higher mix of purchase activity this quarter and the increased sales operations and technology expenses compared to a year ago. We hold $97.9 million in cash, cash equivalents, and short-term investments. We have generated operating cash flows of $44.8 million and performed $25.4 million of share repurchases on a trailing 12-month basis. We have zero debt and $25 million of available borrowing capacity under our credit facility. In the near term, our quarterly results can experience uncertainty in predictability as the current macroeconomic environment lends itself to hesitation by sellers and buyers in the timing of transactions for surplus assets in any given period. As clarity over the direction or severity of global economic challenges unfolds, we would anticipate having better visibility on growth in the short term. As a company, we are confident in our business model and strategic direction. Our results in terms of revenue, profitability, and cash have remained solid even during these turbulent times. Our first quarter of fiscal year 2023 guidance range for GMV is above the same period last year, with year-over-year growth expected across our segments. Relative to the fourth quarter of fiscal year '22 sequentially, seasonality is a factor as GovDeals' GMV may experience a seasonal decline sequentially going into this next fiscal first quarter. Despite the expected year-over-year improvements in volume and buyer and seller activity, we also expect CAG GMV to decline sequentially on lower purchase transaction volume completed during this last fourth quarter of fiscal year '22. GovDeals is also experiencing continued headwinds from vehicle sales in both volume and pricing given constraints on sales of new vehicles that are resulting in a dampening of availability of used vehicles for sale. However, heavy equipment assets in both GovDeals and CAG remain robust. The Retail segment expects to continue to diversify its seller base, transitioning product flows in terms of sellers and categories. Overall, the company sees opportunities to gain market share across our segments. Our profit guidance for the first quarter of fiscal year 2023 reflects expected year-over-year top-line growth with higher labor costs and inclusive of increased sales technology and operations expenses to support growth during 2023 across our segments. We expect that our effective tax rate overall during fiscal year 2023 will remain at approximately 30%. Management guidance for the first quarter of fiscal year '23 is as follows. We expect GMV to range from $265 million to $295 million. GAAP net income is expected in the range of $1 million to $4 million with a corresponding GAAP diluted earnings per share range from $0.03 to $0.12 per share. We estimate non-GAAP adjusted EBITDA to range from $7 million to $10 million. Non-GAAP adjusted diluted earnings per share is estimated in the range of $0.09 to $0.18 per share. And the GAAP and non-GAAP EPS guidance assumes that we have between 33.5 million and 34 million fully diluted weighted average shares outstanding for the first quarter of fiscal year '23. We will now take your questions.

Thank you. And we have Gary Prestopino with Barrington Research. Your question please.

Hi. Good morning, everyone. Hey, Bill. I have a couple of questions. First, you mentioned that GMV faced headwinds on the vehicle side, amounting to $10 million, and you also noted lower conversion rates in real estate. Is that related to higher rates and a lack of agreement on pricing between buyers and sellers? Were your expectations for real estate flow-through and GMV after transactions completed in line with what you anticipated?

Regarding the comment on the government real estate vertical, what we've observed, Gary, is that local counties have made decisions to defer share of sales in part due to consumer-friendly advocacy, which is highlighting some residual COVID policies to allow people to get back current with their real estate forbearance or current recessionary pressures giving policy positions to defer some of these sales. We think that is likely to normalize and reverse in 2023, and, therefore, the sales will happen. So it's not a bid-ask spread issue. It's really a policy position where people have held back the sales to allow them to become pay-off by the individual borrowers or owners. The other thing I would note in the real estate area is, we have a very good pipeline and we have contracts that have been awarded that just haven't been implemented yet, and I think there has been somewhat of a backlog in how government agencies have been able to process their business. So again, part of a larger picture for us is that we do think these things, this logjam will clear out in 2023 and that will give us more visibility and actual GMV traction in the real estate vertical. The vehicles are a well-known industry-wide phenomenon. We've had conversations with our government clients, our commercial clients. There is a significant backlog in how OEMs have been working their backlog down. According to a municipal fleet agency, they have said to us, there are at least 5 million orders on the books for vehicles that have been backlogged industry-wide. So it gives you a sense of the order of magnitude that agencies and commercial owners want the vehicles, they have the money for the vehicles, it's just they are not being produced at the rate that fulfills their demand. And so as that flips from a headwind to a tailwind at some point, we think we'll benefit from it.

Okay. And then, could you talk a little bit about this next generation launch for the GovDeals business? What is different in that new, I guess, it's a new product website that you planning out there?

Yeah. No, that's a great question and I think it's a very important thing. The GovDeals user experience on the front end has been largely intact for over a decade, and there's a lot of functionality there, but it is not at the same level of responsive design and data-driven search and one-to-one marketing as you would see on our AllSurplus platform. And therefore, it's really about the front-end user experience, it's about the taxonomy and the path to purchase being improved, it's about putting artificial intelligence tools in place like we have in our AllSurplus marketplace to guide buyers to the right assets quickly. We think it's going to improve better participation and we think it's going to improve the ultimate GMV realized, all things equal, for everything we sell and the leverage there is meaningful because it's a good-sized marketplace. And we've got our beta in the hands of our test customers already, phenomenal feedback. As I mentioned, our net promoter score for those that have used the new site has more than doubled, which is rare. So we think as that unfolds in 2023, it's just going to improve the path to purchase and the bidding activity and will improve pricing realized for the assets we sell for our government clients on GovDeals.

Okay. Thanks. I'll let somebody else go.

One moment for our next question, please. And it comes from the line of George Sutton with Craig-Hallum. Please proceed.

Thank you. Bill, I'm curious, as you look at your retail segment, what is the ideal economic scenario for you to see success there in your view?

In terms of macro trends, there is a desire for strong growth in online sales and online retail, which we believe has become a well-established habit among consumers and represents a significant growth area in the economy. This trend is beneficial for our business, as increased online sales lead to more returns; during the holiday season, over $150 billion is returned. Additionally, in an environment where bargain hunting prevails, consumers actively seek out deals, which has been reflected in our buyer metrics. Retailers are managing the balance between offering good deals and maintaining stock, having already promoted many holiday sales earlier in the year. As we move past the holiday season, we expect to see a normalization of returns in our reverse supply chain, and retailers will likely continue investing in omnichannel experiences and enhancing convenience through their e-commerce platforms. Data from Bank of America indicates that consumers still possess more savings than they did before the pandemic, which bodes well for the retail environment and, consequently, for us. Increased spending on goods is advantageous for our business. Throughout 2022, we observed a shift in consumer behavior from purchasing goods to services and experiences, impacting overall retail sales. However, we anticipate a reversal in this trend, with spending behaviors normalizing in 2023. While we cannot predict the exact economic conditions, whether a soft landing or a harsher scenario, we hope to see consumers maintain discretionary savings and return to their spending levels from early 2022. Even in a recession, our focus on bargain-seeking consumers provides a strong competitive edge. If retailers need to reduce costs and streamline, they will likely depend more on the value-added services and facilities we offer at Liquidity Services. Thus, we believe we are well-positioned to thrive in this landscape.

Looking at the vehicles supply side, in a very hypothetical admittedly scenario of Carvana, which could end up liquidating, not making a prediction just it's a scenario suggestion, what would that potentially do for your business?

We've had discussions with wholesale automotive dealers who are exploring our marketplace platform for the first time to create a new channel for Liquidity. When vehicles remain unsold, it poses a challenge for these dealerships. We offer our marketplace as an additional way for them to monetize their inventory. As you know, we sell a significant number of vehicles in the used market, and that Liquidity is an important asset for anyone managing their balance sheet in the vehicle industry.

Got you. And last question, I don't know if it was simply a throwaway line in your text, but you mentioned expanding mindshare with customers this year and that being a focus. Could you walk through how you're planning to expand that mindshare? Give us a little bit of a sense of the marketing plans.

Sure. Well, we've invested in expanding our corporate communications team to do, I think, very targeted brand awareness campaigns with these large corporate clients, and in many cases, government organizations to bring them the receipts, if you will, on the work that we've done, the actual transactions that we've completed, the case studies, the recovery that we generate. And so it's content that's created and then delivered through very targeted communication to influencers and decision-makers that may not necessarily be direct clients of ours, but have oversight of the supply chain, operations, the CFO's office, the compliance office within global manufacturers, global retailers, and government agencies, and that might be delivered digitally, and it might deliver you to a case study or landing page and allow you to learn more. We also have industry-specific insights that we're delivering, for example, in automotive, energy, and biopharma, that gives you, I think, relevant data on the market-making activity in those areas. So if you're a CFO, I think it's really helpful to know what amount of balance sheet can I monetize to raise capital in a period where maybe we have to pull back some of our spending. I think that's been well received. We also have presence as a thought leader and speaker in a number of government industry associations. We have national cooperative arrangements directly as a result of these efforts. So we are really just linking the data of our marketplace with insights and delivering that in a scalable way through a lot of digital marketing activities and we do have recognition happening, George, through sustainability awards, through vendor excellence awards with many of our clients, and those are shared through more of a traditional corporate communications, press release format.

So just to be clear, and just my final question, relative to spending for this objective, none of this sounds expensive. This seems simply leveraging of your existing data more so than anything. There was no needing to walk into Jorge's office for more dollars to achieve this.

Yeah. That's fair and the headcount associated with operationalizing these ideas, we've already accounted for.

Thank you. And I'm not showing any further questions at this time. Thank you, ladies and gentlemen. This concludes today's call. Thank you for participating and you may now disconnect.