Liquidity Services, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022; prior-year comparison is the three months ended December 31, 2021. Amounts are in U.S. dollars unless stated otherwise.
Business context
Liquidity Services operates online marketplaces and related services for surplus assets, with four reportable segments: GovDeals, Retail Supply Chain Group (RSCG), Capital Asset Group (CAG), and Machinio. The company reported $270.8 million in gross merchandise volume (GMV), up 4.1%, and 5.0 million registered buyers at quarter-end.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $72.3 million | $66.7 million | +8.4% |
| Operating income | $4.7 million | $4.5 million | +5.4% |
| Net income | $4.0 million | $3.6 million | +10.1% |
| Diluted earnings per share | $0.12 | $0.10 | Up |
| Adjusted EBITDA (non-GAAP) | $9.8 million | $9.4 million | +5.0% |
| Operating cash flow | $(10.7) million | $1.9 million | Down $12.6 million |
| Capital expenditures | $1.2 million | $2.0 million | Down |
Purchase revenue rose 6.7% to $38.6 million; consignment and other fee revenue rose 10.4% to $33.6 million. Cost of goods sold increased 14.4%, faster than revenue, largely reflecting higher RSCG purchase transactions. Segment direct profit was $40.5 million, about 56.0% of revenue, versus $38.9 million, or about 58.4%, a year earlier. Operating margin was about 6.5%, compared with 6.7%.
Segment and period changes
- RSCG: Revenue increased 18.9% to $46.0 million and GMV increased 21.6%; direct profit rose 12.3%, while direct-profit margin declined to 34.8% from 36.9%, reflecting product mix.
- GovDeals: Revenue decreased 2.7% to $13.6 million despite GMV growth of 2.7%. A higher mix of real-estate sales, which generally carry lower take rates, reduced revenue as a share of GMV.
- CAG: Revenue decreased 16.2% to $9.4 million, primarily due to project timing and fewer international spot-purchase transactions. Direct-profit margin increased to 90.5% from 77.8%.
- Machinio: Revenue increased 15.3% to $3.3 million, driven by subscription growth.
Cash and cash equivalents were $76.2 million at quarter-end, down from $96.1 million at September 30, 2022; short-term investments were $3.7 million. Current assets were $113.6 million and current liabilities were $105.4 million. The company had no borrowings under its $25 million revolving credit facility, all of which was available, and reported compliance with its covenants. The facility matures March 31, 2024. Operating lease liabilities totaled $13.1 million; finance lease liabilities were not significant.
Operating cash outflow primarily reflected decreases in accounts payable and seller payables, together with a $4.7 million increase in inventory. Management cited quarter-end seasonality and slower used-vehicle supply as contributing factors. Investing cash outflow was $3.0 million; financing cash outflow was $7.0 million, including $7.2 million of share repurchases.
Outlook, commentary, risks, and unusual items
The filing provides no quantified financial guidance. Management says it believes cash and working capital are sufficient for anticipated needs for at least one year. It describes long-term opportunities in online surplus disposition, sustainability, returns processing, and outsourcing, while warning that macroeconomic and asset-supply conditions can affect results.
- Management identified constrained new-vehicle production and volatile used-vehicle prices, cautious consumer spending, inflation, higher borrowing costs, COVID-related disruptions, and the Russia-Ukraine conflict as risks to GMV, revenue, and margins. Direct revenue associated with Russia and Ukraine was not material in either comparison period.
- Amazon-related merchandise represented 57.3% of consolidated cost of goods sold, down from 60.5% a year earlier, creating significant vendor and sourcing concentration.
- The Bid4Assets acquisition earn-out had an original fair value of approximately $28.0 million. The company reports $3.5 million of payments made and no remaining earn-out liability after the final measurement period ended December 31, 2022.
- The company repurchased 531,819 shares for $7.2 million during the quarter. Remaining repurchase authorization was $7.8 million under a plan extending through December 31, 2024. The filing notes the new 1% federal excise tax on share repurchases effective after December 31, 2022, and says it does not currently expect the Inflation Reduction Act to materially affect its financial statements.
- Two former employees have employment-related claims pending. The company says it believes the claims are without merit and cannot estimate potential liability; its insurer accepted tender of both claims. The age-discrimination claim in one case was dismissed on summary judgment, while race- and gender-discrimination claims remain.
Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. The filing states there were no material changes to the risk factors in the prior Form 10-K.
Key facts for investors to verify
- Whether operating cash flow recovers as seller and vendor payment timing normalizes, and whether the working-capital outflow is seasonal or persists.
- RSCG’s product mix, direct-profit margin, and dependence on Amazon-related supply.
- Used-vehicle availability, real-estate auction mix, and international project timing affecting GovDeals and CAG.
- Cash use for repurchases versus operating and investment needs, and ongoing compliance with credit-facility covenants.
- Developments in the employment litigation and any change in the company’s assessment of potential exposure.