LIQUIDITY SERVICES INC quarterly report, Q2 FY2023

Liquidity Services, Inc. — Q2 FY2023 Form 10-Q

Reporting period: Fiscal quarter and six months ended March 31, 2023; unaudited. Liquidity Services operates online marketplaces and related services for surplus assets through GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and Machinio.

Financial results and liquidity

Metric	Quarter ended Mar. 31, 2023	Year-over-year change
Total revenue	$81.5 million	+19.3%
Operating income	$5.2 million; 6.4% operating margin	−59.6%
Net income	$4.2 million	−64.5%
Diluted EPS	$0.13	vs. $0.35
Segment direct profit	$41.1 million; 50.4% of revenue	vs. $39.3 million; 57.6%

• For the six months, revenue was $153.7 million (+13.9%), net income $8.2 million (−47.3%), and diluted EPS $0.25 versus $0.45.
• Quarterly revenue growth was led by RSCG. Purchase revenue rose 26.5%, while cost of goods sold rose 39.3%, primarily reflecting more purchase-model activity. RSCG’s direct-profit margin fell to 31.1% from 39.7%.
• Six-month operating cash flow was $22.3 million, compared with $14.6 million; capital expenditures were $2.7 million. Cash and cash equivalents were $95.6 million at March 31, plus $5.6 million of short-term investments. Current assets were $130.6 million and current liabilities $124.0 million.
• No revolver borrowings were outstanding. The company reported $25.0 million available under its revolving credit facility, extended to March 31, 2025; it was in covenant compliance. Operating lease liabilities totaled $12.3 million.
• Six-month share repurchases totaled $17.0 million for 1.28 million shares; $6.0 million of authorization remained at quarter-end.

Material changes and unusual items

• The $8.5 million non-cash gain from the Bid4Assets earn-out fair-value adjustment recorded in the prior-year quarter did not recur. This materially affects the comparison of operating income and net income; the remaining earn-out fair value was zero after the final measurement period.
• RSCG revenue increased 28.3% for the quarter, supported by seasonal returns/liquidations, client diversification, and expanded sales channels. Management cited a shift toward lower-value purchase-model products and a $0.6 million inventory provision as margin headwinds.
• GovDeals revenue rose 3.6% despite a 6.9% GMV decline, with lower foreclosed-property auction volumes partly offset by personal-property sales and higher take rates. CAG and Machinio revenue increased 4.7% and 13.4%, respectively.
• Quarterly GMV was $282.7 million versus $276.9 million. Auction participants declined to 797,000 from 829,000; completed transactions fell to 209,000 from 245,000. Registered buyers increased to about 5.0 million from 4.8 million.

Outlook, risks, and contingencies

• The filing provides no specific numerical revenue or earnings guidance. Management said the $95.6 million cash balance was expected to meet anticipated needs for at least one year from the financial-statement date.
• Management identified used-vehicle supply and price volatility, cautious consumer spending, inflation and higher borrowing costs, supply-chain disruptions, and uncertainty related to the Russia-Ukraine conflict and U.S.-China tensions as factors that may affect GMV, revenue, and margins. The company said direct revenue associated with Russia and Ukraine was not material.
• Amazon-sourced merchandise represented 63.2% of consolidated cost of goods sold in the quarter, creating notable vendor and purchase-model concentration. The company also disclosed cash balances above applicable deposit-insurance limits and added financial-services-industry instability as a risk, while reporting no deposits or lending relationships with the banks that failed in March 2023.
• Two former-employee discrimination/retaliation matters remain disclosed; the company says it believes the claims are without merit, cannot estimate potential liability, and reports that its insurer accepted tender of the claims. The filing states other ordinary-course litigation is not expected by management to have a material adverse effect.
• The company expects to adopt the credit-loss accounting standard in fiscal 2024 and was evaluating its impact. It did not identify goodwill or material long-lived-asset impairment indicators in the period.

Important facts for investors to verify

• Whether RSCG purchase-model growth can be sustained without further deterioration in direct-profit margins, and the effect of inventory valuation and product mix.
• Ongoing exposure to Amazon-sourced inventory, which accounted for 63.2% of quarterly cost of goods sold.
• Cash availability and exposure to uninsured balances, alongside the company’s stated liquidity, credit-facility capacity, and covenant compliance.
• Progress and potential financial exposure in the disclosed employment-related litigation, and developments in market, supply-chain, and used-vehicle conditions.
• Comparability of earnings against the prior period, which included the one-time $8.5 million earn-out fair-value gain.