Earnings Call Transcript - LQDT Q1 2021

Operator, Operator

Welcome to the Liquidity Services Inc. First Quarter Fiscal Year 2021 Financial Results Conference Call. My name is James, and I'll be your operator for today's call. Please note that this conference call is being recorded. All participants are in 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, our Executive Vice President and Chief Financial Officer. They will be available for questions after their prepared remarks. The following discussion or responses to your questions reflect Liquidity Services management's views as of today, February 4, 2021, 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 filings with the SEC, including our 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. And as press release and our filings with the SEC, each of which is posted on its website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Liquidity Services management also uses certain supplemental operating data as a measure of certain components of operating performance, which I 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'll turn the presentation over to Liquidity Services' CEO, Bill Angrick.

William Angrick, CEO

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. We are pleased with our continued strong momentum, as reflected in our Q1 financial results, and are very proud of our team's effort to safely deliver outstanding results for our customers, both in our fulfillment centers and remotely during the quarter. Our E-commerce Marketplace Solutions are resonating with both large enterprises and small businesses, which is contributing to strong organic growth and market share expansion. Our team has carefully listened to the needs of our customers, and we continue to deliver the right tools, services, and strong buyer liquidity to ensure sellers and buyers in every major sector of the economy successfully monetize assets. This is translating into results. Consolidated GMV was up 28% year-over-year. The number of auction participants was up 14% year-over-year, our completed transactions rose 12% year-over-year, and we grew our adjusted EBITDA by $10.9 million over the prior year period. Our solutions continue to drive strong recovery for sellers and have enabled us to scale our services quickly, as more customers seek efficient self-service solutions with optional value-added services we provide to manage surplus and returned goods in the global supply chain. The demand for our services and marketplace is growing along every dimension by size of customer, geographic region, and product category. This past quarter, we helped sellers monetize assets in a diverse range of categories, including vehicles, construction equipment, biopharm assets, industrial machinery, real estate, and consumer goods such as apparel, consumer electronics, jewelry, and housewares. Our newest marketplace AllSurplus.com features all of these categories and more for over 3.8 million registered buyers to view, bid, and buy using our Mobile First platform and personalized recommendation engine. Indeed, through our domain expertise, innovative technology platform, and integrated services, we are driving a continued digital transformation of the reverse supply chain across the retail, industrial, and public sector markets, which together comprise a $100 billion market opportunity for Liquidity Services. Overall, our strategy and platform investments have yielded strong results to date. We are well aligned to the needs of where the customer is going in the future in the changing landscape with higher e-commerce demand. GMV in our GovDeals segment grew a record 36% over the prior year's comparable quarter, as more government agencies utilized our digital platform to transact higher volumes across a larger breadth of key categories, and our growing buyer base in automated asset promotion tools drove higher realized values through our marketplace. GMV in our Retail Supply Chain Group segment grew 30% over the prior year's comparable order as more large and SMB retail sellers utilized our platform, resulting in higher transaction volumes on our marketplace. GMV in our Capital Assets Group segment increased 5% year-over-year, driven by strong results in our heavy equipment, biopharma, and energy verticals. Finally, our Machinio segment grew revenue by 14% during the quarter, as equipment owners benefit from the Machinio.com classified marketplace as well as our machinery host inventory management system that together connect with buyers at lower cost when compared to traditional marketing channels. Looking forward, we're well positioned to help our customers continue to adapt to the changing landscape of the global economy, including the continued growth of e-commerce, the need of organizations of all sizes to leverage technology to drive supply chain efficiencies and monetize assets, and the increasing focus by business and government customers on sustainability. These needs are not unique to the current climate of a pandemic. Over time, Liquidity Services has proven to be a constant cyclical business that helps sellers create value both in periods of economic expansion and contraction. We currently have strong activity in our sales pipeline and are optimistic about our growth prospects. Against this backdrop, we remain focused on our goal of equipping $1 billion of annualized GMV by continuing to execute our rise strategic plan. In closing, we thank our team members across Liquidity Services for their dedication to our mission. We're excited to continue our role as a global market leader to create value for our customers and shareholders. I'll now turn it over to Jorge for more details on the quarter.

Jorge Celaya, CFO

Thank you, Bill, and good morning. We completed the first quarter of fiscal year 2021 with GMV of $190.4 million, a 28% increase from $148.6 million in the prior year's comparable period. Revenue for the first quarter was $55.8 million, a 13% increase compared to the same quarter last year, while net income for the first quarter was $4.5 million, resulting in diluted earnings per share of $0.13. Our results compared to the same quarter last year have shown significant improvement. Non-GAAP adjusted EBITDA was $8.8 million, a $10.9 million improvement. The first quarter fiscal year 2021 comparative year-over-year consolidated financial results reflect increased volumes across all of our segments, with the largest increases in our GovDeals and retail RSCG segments as businesses and government agencies continued to benefit from our safe and effective e-commerce solutions. The mix shift to more consignment, which includes self-directed solutions, is reflected in improved gross profit margins to 60% this quarter from 51% last year. We have experienced improved margins from the mix of products sold in both retail and GovDeals, and asset recovery rates achieved. Our bottom-line results reflect these benefits to gross profit margin, the overall increase in top-line volumes across our segments, and leverage in our operating expenses. A key goal of our multiyear business transformation and investments in our technology has been to enable us to provide more diverse service offerings and leverage our platform for scale and more profitable results. We are pleased with our ability to have sustained solid performance this past quarter. Specifically comparing these first-quarter results for the same quarter last year, our GovDeals segment was up 36% on GMV and 35% on revenue. Our retail RSCG segment was up 30% on GMV and up 10% on revenue, and our CAG segment GMV was up 5% and flat on revenue. Machinio's revenue was up 14%. We have a debt-free balance sheet, completed $4.1 million in stock repurchases during the quarter, and ended the quarter with $77.8 million in cash, up $1.8 million from last quarter. Looking ahead, we continue to see a solid pipeline, strong customer relationships, and indicators of positive performance going forward, despite the general economic uncertainties globally and any possible shifts in related business dynamics and government spending. In spite of long-term macro drivers, the timing of business activity across our segments and historic seasonality trends are difficult to predict, especially for any given quarter, given the uncertainties still being faced. We will therefore not provide quarterly guidance and reassess future guidance on a quarterly basis. Financial results for Q2 of fiscal year '21 are expected to improve year-over-year. We remain optimistic about our prospects given our strong position in our key markets and marketplaces, our enhanced platform services, and the trends pointing towards a long-lasting shift to online transacting by businesses and governments alike. We continue to be highly focused on creating efficiencies and benefits to enable our growth through an asset-light, low-touch marketplace solution. As e-commerce penetration continues to grow substantially, our online platform and cloud-based solutions should become an integral part of the evolving economy. Thank you. We will now take your questions. James?

Operator, Operator

And we have Colin Sebastian of Baird with our first question.

Dalton Kern, Analyst

This is Dalton Kern for Colin. All right, so congrats on the quarter, guys. A couple of questions here. I know you're not giving guidance on fiscal second quarter. But as we think about returning to normal seasonality and some of these segments here, kind of wondering if you can give us a sense for what to expect in CAG moving forward? Obviously, there's been quite a bit of improvement as we've finally lapped the wind-down in the scrap contract. But thinking about that moving forward, there's a great deal of volatility given the size of the contracts there. Can you give us a sense for what normal seasonal patterns will look like there? Now that we've lapped all those wind-down impacts? And then maybe looking at this quarter specifically, the biggest drivers of gross margin improvement sequentially there and whether you think that's going to be sustainable? Thanks.

William Angrick, CEO

I'll take the question, Dalton, and welcome to the call. CAG is a business that ultimately embraces all of these macro trends we discussed. There is a large global buyer community that inherently benefits from transparency in these equipment events and sales that we conduct on our platform. The seller community for the CAG business appreciates the importance of sustainability in managing efficiencies in the supply chain, having better record-keeping and oversight of how the full asset life cycle is managed; all of those play to our strengths. We believe this is a double-digit organic growth business and that it is getting more efficient over time because of the work that we've put in over the last few years to improve the marketing technology stack. The tech stack has given sellers and buyers more tools to manage these transactions directly on the platform. We believe that both with the self-service options and our value-added services, which individual sellers can elect to use, they can elect to have us do more on-the-ground manifesting and valuation work and in some cases even help move assets. We are able to do all that or use third parties to do that. Most often, sellers like to have control and we give them tools to do that. Broader, we have an organization geared to helping sellers in Europe, the Americas, and Asia access Liquidity for key verticals. The verticals that have been very active for us include biopharm and healthcare. There's just billions of dollars being invested in R&D, and all of the testing and measurement equipment in that market is regularly upgraded. That also overlaps with the university lab market that we handle quite a bit of work with and product flow. The global energy marketplace is quite active for us and has been for many years, and we provide cross-border liquidity for that. The global automotive sector is a big driver for us. Transportation is undergoing a lot of technology change. We're well positioned to drive double-digit organic growth, a more efficient business model, and a model that allows more self-service opportunities. I mentioned last quarter how we went live in South Africa with the AllSurplus platform as an example where we can extend the reach of our platform in some cases with local partners using our tech platform. The local partner can provide some value-added services for the sellers but only the transaction clears on our marketplace. We're excited about the growth prospects. The reason that business is volatile is that when you're working with Fortune 500 companies, the individual asset sales amounts in values are very large. You may have multimillion-dollar asset sales regularly drop in our marketplace. Those may move a month or two in an environment where due to the pandemic and regulatory rules, you may have restrictions on travel or quarantine barriers that affect the timing of sales or inspections of assets. Therefore, these large transactions can shift from one period to the next. So, in the short term, that makes visibility in a particular quarter more difficult to predict. But in the long term, we really like the opportunity to be that global marketplace for high-value assets, where we have a lot of past performance, integrity, and credibility with sellers and buyers. I think the second question was related to margins. I'll give a few comments, and Jorge can also add his perspective. Our business records GAAP revenue. GAAP revenue is an output metric; it's not a driver for us; we don't provide guidance on GAAP revenue. Our goal, as imbued in our rise strategies, is to drive maximum recovery, volume, and high service levels, leveraging our expense base to satisfy the needs of customers. We employ a variety of pricing models; in some cases, we do revenue shares that could include taking title to goods. When we take title to goods, we record the full GMV of the goods as GAAP revenue. That's not the ultimate driver for the business. What helps us grow is driving strong value realized in the marketplace, which is reflected in GMV. More of our clients have used the consignment pricing model in the last year, and we're at a record high consignment level as a percentage of the whole. When we see growth in our consignment model, we book the fees associated with that service level on GAAP revenue. This evolution has made revenue a smaller percentage of GMV but it's a much more profitable stream for us. We don't typically touch the assets; they're sold in place. We prefer to look at our margin profile as our earnings as a percentage of either gross profit or net revenue. Gross profit is a proxy for net revenue or GAAP revenue. That's been very strong for us, and we continue to see that as the future of our margin profile with a mix shift to lighter touch consignment business where gross profit and EBITDA as a measurement of profit will be very important. There are other segments of our business that don't have GMV. The Machinio segment, for example, is a subscription model, and all of that is service-related with no GMV. There are tremendous synergies between the equipment sellers on Machinio and our transactional marketplaces, which we're beginning to realize, but there is no GMV associated with that business. We've seen a mix shift, and I think we had some commentary in the release and in our Q about gross profit margins expanding, and we think that's sustainable. Anything to add, Jorge?

Jorge Celaya, CFO

Sure. And just add a little more detail to what Bill just said. When you look back, you would have seen a ratio of revenue to GMV close to mid-30s when we had the DoD contracts where it was all a purchase model. As we grow, we've been targeting to grow the mix of consignment and specifically self-directed consignment business, and that has been growing faster than the purchase model, which will inevitably drive that gross profit margin. Instead of having revenue to GMV in the mid-30s, we're now at the give or take 29% ratio of revenue to GMV. You see we beat your GMV estimates for the quarter. As you look forward, where we are now in terms of that revenue-to-GMV ratio, it's probably a better ratio to look at going forward simply because of our improvements in growing our consignments, specifically our self-directed business, plus not having that DoD contract if you go even further back in history. So, this last quarter, you see that this quarter. So again, give or take that's probably a better proxy. From our gross profit perspective, as a percent of revenue, I mentioned that we're at 60%. Being in this high 50% to 60% gross profit as a percentage of revenue is a good place for us to be. When we have provided guidance, we've focused on GMV; that's much easier to predict, given how clients shift between the two different models. In some cases, like Bill's example of CAG, where things can shift by months, therefore the growth rate can vary. In the long run, it equalizes, but we also have in a business like that the decisions with clients on whether they go through a purchase model or a consignment model. That makes it a little more difficult to predict. But bottom line is, if we sustain the growth we're looking for and we focus on these levels of gross profit, then the rest kind of takes care of itself because we have a pretty well-controlled operating expense situation. We feel pretty good about the bottom line.

Dalton Kern, Analyst

Appreciate all the detail on that, it's really helpful. One more quick one if I can. Looking at the RSCG segment here and thinking about the shift to e-commerce and elevated returned volumes associated with that. Just wondering if you can give any color on if you've been seeing a lift related to that following the holiday season, kind of what we should expect thereafter, a little bit of sequential moderation in GMV in the quarter? Assuming that there'd be a bigger lift post-holiday. But just wondering if those return rates are any different from what you'd be seeing from normal e-commerce volumes for the year? Thanks.

Jorge Celaya, CFO

I will address that. Dalton, we began our business many years ago, realizing that the world was going to a digital first e-commerce world. Certainly, the pandemic accelerated all facets of procurement of day-to-day necessities and discretionary items online. I think that's rippled through the B2B markets as well. People are becoming more habitual in searching for products and services online being more comfortable purchasing even very high ticket items online. We're a beneficiary of that. That relates to being viewed by the large omnichannel and e-commerce retailers as the most safe, durable, scalable, reliable solution to handle high volumes of returned goods. That's reflected in the number of new clients we've activated, the growth within existing accounts. Many newer versions of e-commerce players never had a warehouse facility or a retail store network. They need attention and support on the reverse supply chain right out of the gates, and we're there to provide that. We've equipped these sellers with more options. They can load and sell directly on our platform. They can ask us for some of the services. Our warehouse distribution center network has been an essential supply chain function throughout the past 12 months and is available to many of our clients who don't have the resources to focus on returns management. That's only going to strengthen over time. I've always said there is low entry; anyone can get two men in a truck and try to buy a pallet or truckload of goods, but there are significant barriers to scaling. We're at a level of scale where we are a durable solution for our clients who depend on us to provide velocity of asset sales and recover that capital for them to focus on their core business. Our clients would rather optimize their full margin products for supply chain activities than get caught up in open box returns. If you can't be available for these clients seamlessly week-over-week or month-over-month, then the repercussions of that are operational bottlenecks in their facilities that affect their forward business, and the cost of that is far greater than the benefits of managing it on their own. We're very well positioned to capitalize on e-commerce growth as it unfolds.

Operator, Operator

Our next question is from Gary Prestopino of Barrington Research.

Gary Prestopino, Analyst

Hi, good morning. I have a couple of quick questions, and just some simple answers would be helpful. First of all, can you give us some idea directionally of how, since you've got the new platform going and all that, on a year-over-year basis, you've improved returns on GMV for your clients?

William Angrick, CEO

We've got, I'd say, you're looking at double-digit 20% type of improvement, and also the recommendation engine component of the platform is important. With our 3.8 million registered buyers, they are typically going in for a specific type of asset, but the recommendation engine allows them to be exposed to adjacencies to their initial query. Those adjacencies open up additional lift in terms of penetrating the buyer base and driving higher recovery. So, 20% would be around the number I would use.

Gary Prestopino, Analyst

Great. That's encouraging. And then with this recommendation engine that you talked about, is that part of the AllSurplus market or is that just generally a part of every market that you walk?

William Angrick, CEO

We pioneered it with our AllSurplus marketplace, and we are using it as the sort of proving ground to then expand to other marketplaces.

Gary Prestopino, Analyst

Okay. And then can you slap some metrics around that that will just highlight how much improvement in your business or your GMV has come from having the AllSurplus market?

William Angrick, CEO

We wouldn't have standalone metrics that we would be saying regularly publishing on that. Ultimately, for a merchandising engine, we capture information about a lot of different products and then we match that product with the qualified logical buyer base. The more that can be done using machine-driven tools, the more efficient our business becomes. It becomes less manual, less expensive, and more effective. Over the years, we've segmented the right buyers for over 500 different categories. We're able to utilize various tools to contact and reach and continue to engage those segment buyers for categories such as retail, consumer goods, biopharm equipment, and transportation equipment. More of that is happening in an automated, always-on way versus when we started, you might have had someone in customer service area calling someone and saying, 'Gary, I know that you bid on a Ford 150.' We have more Ford 150s coming, or even today you have people doing live events where there's a lot of costs associated with getting people to that location. We've moved away from that for many years. The important point for us is that we feel we are still improving the recovery rate and we're finding more upside and lift from investing in these technology tools and learning more about our customers. Our customers, their clickstream, and their buying/viewing/bidding patterns allow us to present more for them to buy, more reasons to be on our marketplace, and that will provide upward movement and recovery over time. They'll be more satisfied with the relevant offers they receive. We also provide a classified marketplace for used equipment. The Machinio marketplace is a non-transactional marketplace where equipment owners can publish their available inventory and try to find end-users for that inventory. In many cases, they'll be successful, but they'll need a more accelerated sale through the auction channel. We're providing that full breadth for both the direct sale to end-users as well as the auction channel for things that are slow-moving or not getting the desired velocity through that channel. We gather a lot of data from the Machinio classified marketplace about trends in supply and demand in different categories. That gives us a great perspective on how to market effectively.

Gary Prestopino, Analyst

Okay. Then just a couple more here. I heard you mention a $1 billion target for GMV in your narrative. Is that something you're looking forward to doing in fiscal '21, or is that something that you're targeting a year out from now?

William Angrick, CEO

Well, this is our, what I would call, our target model; it is sort of an evergreen focus for us as an organization. Eclipsing a billion of annualized GMV is just a point of reference for us internally to say we've created enough value and enough supplier and buyer relationships to be one of those few e-commerce marketplaces to have achieved that mark. We don't have a set timeframe on that. Obviously, we did $190 million in GMV in the current quarter, so there's a gap to go there, Gary. We see that as our sort of guiding ambition in the near term. It's not going to be in the next few quarters, but certainly in the next few years, and we're going to get to that point. It's one of those things that we continually reference as a satisfying intermediate goal. We feel very good about the position of the company to ultimately achieve that goal.

Gary Prestopino, Analyst

Okay. And then lastly, I know you've said that year-over-year, your quarter will be better than it was. I mean, last year, you generated a loss and EBITDA, I believe. On a sequential basis, what are you thinking for the quarter? And then, I guess the second question I would have, and I'm just talking about directionally. Will Q2 be stronger than Q1? The whole issue of not giving guidance, which you did give for Q4. You've kind of pulled back on that. Is there something that has changed in the visibility of the business or your outlook that had you pull guidance on a quarterly basis?

William Angrick, CEO

Let me just say, my philosophy as a business owner has been to continue to execute the strategy. We haven't had any fundamental change in the business or the prospects of the business. What we are seeing though is there's very uneven management of government guidelines and travel restrictions, and vaccine-related rollouts do play a role in the ability to transact business in some of our sub-markets. CAG, as an example, has a lot of folks that are cross-border in nature, making it harder to predict. We think it was prudent to not assume that everything is back to the pre-COVID world and have our normal routine around guidance. We feel that there's still some execution in the way the government is handling the rollout of the vaccine to allow us to use our typical approach to guidance. So, it's more about that than anything we're seeing changing in our business.

Jorge Celaya, CFO

If I can add, Gary. The last earnings call was our year-end, and we did it in December. We had the benefit of having October and November visibility. We're now back to a regular quarter, and we're just starting to see our January results. So, obviously, if I'm sitting two months into a quarter, it's a lot easier to give guidance than if I'm sitting only one month into a quarter, simply because of timing issues.

Operator, Operator

And we have Dalton Kern again of Baird.

Dalton Kern, Analyst

Thanks, guys. Just one more if I can. Looking at your cash flows here, it seems like you've been able to generate some net string of cash flow profitability here in four straight quarters for the first time in a while. So just wondering if you can update us on your thinking about capital allocation strategies from here. Obviously, investing in the right strategy is going to be a core part of that. But just wondering where the core investments are related to that that still remains? And as you're thinking about growing and expanding the business, obviously Machinio has been a big contributor to gross profit expansion recently. So just wondering how you're thinking about the opportunity for potentially expanding into other segments to help bridge the gap to that $1 billion GMV target?

William Angrick, CEO

We think about businesses as ones that have good casual characteristics, ones that have high returns on effort and investment. The product roadmap is a key part of capital allocation. We're rolling out new products that provide the customer more control in how they market and sell through our marketplace platform. We have a product called Scan.N.$ell that's been used by many of our clients. We've expanded that to a comparable tool in the warehouse with many of our clients called Load and Sell. Those require some IT investment. We've rolled out something called Machinery Host, which is an e-commerce storefront, really inventory management and marketing storefront for equipment dealers and owners, and that's been well-received. We're investing in the AllSurplus Liquidity One platform as well. We're adding some new payment features and streamlining the way customers get paid and monitor transactions to make it more seamless. We still have a lot of governments that insist on paper checks, and we’re trying to bring them into the 21st century. We have some investments there. A lot of investment focuses on marketing and sales to remove friction from the process to get more of our sellers doing things in an automated fashion. We're excited about that. We have done some buybacks and are looking at areas of opportunity in the M&A world, more in the tuck-in variety; that's always something we monitor. Many people have looked at us and thought, 'Can I be part of that?' because you scale your business, and the partners might have some domain expertise in the category or region.

Jorge Celaya, CFO

One thing just to keep in mind as we look at our operating expenses and any investments, we may make in operating expenses, whether it be technology or marketing. Yes, in the previous year, we focused on certain things, and now in this next year we'll be shifting to focus on other things. But generally speaking, at least for our internal goals, we don't think that there's some significant incremental expense required to achieve our incremental top-line growth. If we look further down the road, maybe those will be in play for positioning ourselves for the longer run. But just from a base business model perspective, we're in really good shape. Yes, there are going to be some inflationary things that happen to your expenses but generally speaking, we feel pretty good about our operating expenses as we go forward this next year to achieve our internal goals from a growth perspective.

Operator, Operator

And there are no more questions.

William Angrick, CEO

James, if there are no more questions, you can conclude.

Operator, Operator

Very good. Thank you. And thank you, ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect.