Liquidity Services, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2023. Unless noted otherwise, financial amounts are in U.S. dollars.
Business context
Liquidity Services operates online marketplaces and related services for the resale of surplus assets. Its four reportable segments are GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and Machinio. For the quarter, GMV was $334.0 million, up 2.8% year over year; for the nine months, GMV was $887.5 million, up 2.9%.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $80.8 million, up 15.6% | $234.5 million, up 14.5% |
| Operating income | $8.3 million, down 55.8% | $18.2 million, down 49.6% |
| Net income | $6.5 million, down 60.5%; diluted EPS $0.21 | $14.7 million, down 54.0%; diluted EPS $0.46 |
| Operating cash flow | Not presented for the quarter | $32.4 million, versus $31.1 million |
| Non-GAAP Adjusted EBITDA | $13.3 million, versus $11.9 million | $33.1 million, versus $30.4 million |
Purchase revenue grew 20.6% in the quarter and 18.0% year to date; consignment and other fee revenue increased 10.5% in both periods. Consolidated segment direct profit was $45.6 million for the quarter (56.4% of revenue) and $127.2 million year to date (54.2%). Operating margin was 10.2% for the quarter and 7.8% year to date; net margin was 8.0% and 6.3%, respectively. These calculated margins compare with 26.8% and 17.6% operating margins, and 23.5% and 15.6% net margins, in the prior-year periods.
The prior-year comparisons include noncash gains from reductions in the Bid4Assets acquisition earn-out liability: $11.5 million in the prior-year quarter and $20.0 million in the prior-year nine-month period. No such gain was recorded in 2023. This accounting item materially benefited prior-year GAAP operating income and net income; Adjusted EBITDA increased in both 2023 periods.
Segments and material changes
- RSCG: Quarterly revenue rose 20.3% to $51.0 million as GMV increased 20.2%, supported by new and expanded client programs and improved recovery rates. Direct-profit margin declined to 35.1% from 37.6%, reflecting a higher purchase-model mix and inventory provisions.
- GovDeals: Quarterly revenue increased 4.1% to $17.3 million despite a 4.1% GMV decline, as increased marketplace activity and higher take rates offset lower volumes of lower-take-rate foreclosed real estate.
- CAG: Quarterly revenue rose 15.2% to $9.0 million and direct profit increased 26.6%, supported by consignment sales in industrial and heavy-equipment categories and a favorable transaction mix.
- Machinio: Quarterly revenue increased 13.4% to $3.6 million, attributed to price increases and subscriber growth.
Cash, debt, and liquidity
- At June 30, 2023, cash and cash equivalents were $98.1 million and short-term investments were $7.7 million, compared with cash of $96.1 million and short-term investments of $1.8 million at September 30, 2022.
- The company had no borrowings under its $25.0 million revolving credit facility; the full amount was available. The facility matures March 31, 2025, and the company reported compliance with its covenants.
- Nine-month investing cash outflow was $9.5 million, including $5.6 million of short-term investment purchases and $3.9 million of capital expenditures. Financing cash outflow was $21.8 million, including $21.2 million of share repurchases.
- Management said available cash and investments were sufficient for anticipated cash needs for at least one year from the financial-statement date. The company had $1.8 million of remaining share-repurchase authorization at June 30.
Outlook, risks, and contingencies
The filing provides no specific revenue, earnings, or other quantitative guidance. Management describes long-term opportunities from growth in online returns, sustainability requirements, outsourcing of surplus disposition, and marketplace adoption. It also cautions that supply-chain constraints, cautious consumer spending, used-vehicle price volatility, inflation, higher borrowing costs, geopolitical tensions, and disruptions in financial services could affect GMV, revenue, costs, and margins.
Management noted that lower availability of used vehicles and shifting consumer demand can affect asset supply and transaction mix. Cash flows may also fluctuate with the timing of buyer collections and seller settlements, particularly for GovDeals real-estate sales. Amazon-related inventory was $6.0 million at June 30, 2023; purchase-model transactions are a minority of GMV but account for a significant portion of cost of goods sold. The company also identified the upcoming adoption of the expected-credit-loss standard in fiscal 2024; its impact was not yet determined.
Two employment-related lawsuits involving former executives remain pending. The company considers the claims without merit and cannot estimate potential liability; its insurer accepted tender of both matters. A trial in one case was scheduled for October 30, 2023. The company also guarantees certain UK pension-plan obligations up to £10 million. It reported no other pending or threatened claims that management judged likely to have a material adverse effect.
Important facts for investors to verify
- Whether RSCG’s higher purchase-model mix and inventory provisions continue to pressure direct-profit margins.
- Whether the revenue and profit trend persists absent the prior-year Bid4Assets earn-out gains.
- How seller-settlement timing and real-estate auction activity affect operating cash flow.
- Progress and potential exposure in the employment lawsuits, and the pension guarantee obligations.
- The effect of macroeconomic conditions, key merchandise sourcing relationships, and adoption of the new credit-loss accounting standard.