Liquidity Services, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context
Liquidity Services operates online marketplaces and related services for surplus and salvage assets through GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and Machinio. GovDeals includes Bid4Assets, acquired November 1, 2021. The acquisition’s results were reported as immaterial to consolidated revenue and net income for the periods presented.
Key financial results
| Metric | Three months ended June 30, 2022 | Prior year | Nine months ended June 30, 2022 | Prior year |
|---|---|---|---|---|
| Revenue | $69.9 | $69.7 | $204.8 | $187.2 |
| Operating income | $18.7 | $8.6 | $36.2 | $18.9 |
| Net income | $16.4 | $8.4 | $32.0 | $18.2 |
| Diluted EPS | $0.50 | $0.24 | $0.94 | $0.52 |
| Operating cash flow | Not provided for the quarter | Not provided | $31.1 | $54.3 |
| Non-GAAP Adjusted EBITDA | $11.9 | $13.3 | $30.4 | $31.5 |
Quarterly revenue was nearly flat, while nine-month revenue rose 9.4%. Purchase revenue fell 6.2% in the quarter, partly offset by an 8.0% increase in consignment and other fee revenue. The reported quarterly operating margin was about 26.8%, versus 12.3% a year earlier; this comparison is materially affected by the Bid4Assets earn-out remeasurement gain described below. Nine-month operating margin was about 17.6%, versus 10.1%.
Consolidated segment gross profit was $40.9 million in the quarter, down from $41.1 million, and $119.2 million for nine months, up from $109.7 million. Segment gross profit as a share of revenue was approximately 58.6% for the quarter and 58.2% for nine months. Adjusted EBITDA declined despite higher nine-month revenue, reflecting operating-cost growth and the exclusion of the earn-out fair-value gain from this non-GAAP measure.
Liquidity, debt, and cash flows
- Cash and cash equivalents were $88.3 million at June 30, 2022, compared with $106.3 million at September 30, 2021. Current assets were $120.3 million and current liabilities $126.9 million; the resulting current ratio was approximately 0.95.
- There were no borrowings under the $25 million revolving credit facility at June 30, 2022, leaving $25 million available. The facility matures March 31, 2024, bears variable-rate interest if drawn, and includes financial and other covenants; the company reported compliance.
- Nine-month operating cash flow was $31.1 million, down $23.1 million year over year, primarily due to smaller cash-flow contributions from accounts payable and seller payables. Investing used $17.4 million, including $11.2 million net cash paid for Bid4Assets and $6.3 million of capital expenditures. Financing used $31.0 million, including $25.4 million of share repurchases and a $3.5 million acquisition earn-out payment.
- Operating lease liabilities totaled $15.5 million; finance lease liabilities were $0.4 million. The company reported no material off-balance-sheet arrangements.
Material changes and segment trends
- GovDeals: Quarterly revenue increased 13.2% and GMV increased 52.2%; nine-month revenue rose 23.8%. The larger real-estate contribution, including Bid4Assets, carries a lower revenue take-rate, reducing revenue as a percentage of GMV.
- RSCG: Quarterly revenue fell 3.9% and segment gross profit fell 10.2%, with fewer higher-value products in some returns programs and lower gross profit mix. Nine-month revenue increased 4.1%, but gross profit margin declined.
- Capital Assets Group: Quarterly revenue fell 7.9%, while nine-month revenue increased 8.2%. Management cited China COVID-19 lockdowns and disruption to global supply chains and trade as risks to asset volumes.
- Machinio: Revenue increased 27.1% in the quarter and 30.0% for nine months, attributed to more subscribers and higher pricing.
- Registered buyers were approximately 4.84 million at June 30, up 22% year over year; management attributed about 16% of the increase to Bid4Assets. Quarterly auction participants rose to approximately 884,000 from 617,000, and completed transactions to approximately 253,000 from 185,000.
Outlook, unusual items, and risks
- The filing provides no specific numerical revenue, earnings, or cash-flow guidance. Management stated that cash on hand was sufficient for anticipated needs for at least one year from issuance of the statements and expects continued investment in technology, marketplaces, and distribution capabilities.
- A non-cash gain from reducing the Bid4Assets earn-out liability was $11.5 million in the quarter and $20.0 million for nine months. The liability fell to $4.5 million at June 30 from $26.9 million at December 31, 2021, primarily because of delays in real-estate auctions and transactions. A $3.5 million threshold payment was made in the quarter. Earn-out consideration could total up to $37.5 million, subject to EBITDA targets through December 31, 2022.
- Bid4Assets purchase accounting remained preliminary, including the valuation of acquired intangibles, earn-out liability, taxes, and goodwill. The acquisition added approximately $30.0 million of goodwill, which is not tax deductible.
- Management cited uncertainty from COVID-19, inflation, interest-rate changes, supply-chain disruptions, and the war in Ukraine. Russia and Ukraine revenue was not material, but broader market volatility, client project delays, asset availability, currency movements, and cyber risk could affect results. Amazon-sourced inventory represented 61.1% of consolidated cost of goods sold for the quarter and 57.7% for nine months.
- Two former employees have employment-related claims. The company considers the claims without merit, cannot estimate potential liability, and reports that its insurer accepted tender of the claims. Management stated it knew of no other pending or threatened matter expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported earnings growth reflects the non-cash Bid4Assets earn-out gain, and how underlying segment profitability compares with Adjusted EBITDA.
- Whether RSCG’s lower-value product mix and cost growth persist, and whether GovDeals can sustain growth as real-estate sales increase at a lower take-rate.
- Bid4Assets auction timing, future EBITDA performance, remaining earn-out payments, and the final purchase-price allocation.
- Cash-flow variability from seller settlements and payables, alongside the company’s continued capital spending and share repurchases.
- Exposure to Amazon vendor contracts, macroeconomic and geopolitical disruption, and the outcome or potential cost of the disclosed employment claims.