Liquidity Services, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; comparative period is the three months ended December 31, 2019. The company operates online marketplaces and related services for surplus and used assets across GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and Machinio.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $55.8 million | $49.5 million | +12.6% |
| Gross profit | $33.2 million | $25.3 million | +31.0% |
| Gross margin | 59.5% | 51.2% | +8.3 percentage points |
| Operating income (loss) | $4.6 million | ($5.0 million) | Turned profitable |
| Net income (loss) | $4.5 million | ($5.2 million) | Turned profitable |
| Diluted EPS | $0.13 | ($0.15) | Turned profitable |
| Operating cash flow | $6.0 million | ($18.6 million) | Improved $24.6 million |
- Revenue comprised $31.1 million of product revenue, up 2.4%, and $24.7 million of fee revenue, up 28.8%. The fee-revenue mix rose to 44.3% of total revenue from 38.7%.
- Consolidated GMV increased 28.1% to $190.4 million. Management reported about 517,000 auction participants, versus 453,000, and approximately 152,000 completed transactions, versus 136,000.
- Segment revenue: GovDeals $10.8 million (+35.0%); RSCG $34.9 million (+10.1%); CAG $7.9 million (-0.4%); Machinio $2.1 million (+14.3%). RSCG gross margin rose to 41.9% from 32.5%; other segment gross margins were GovDeals 94.3%, CAG 80.3%, and Machinio 94.2%.
- Cash and cash equivalents were $77.8 million at quarter-end, versus $76.0 million at September 30, 2020. Current assets were $100.9 million and current liabilities $77.3 million. The company reported no debt and no short-term investments; $30.0 million of cash was held in money market funds.
- Investing cash use was $0.8 million, including $1.4 million of capital expenditures, partly offset by $0.5 million in promissory-note proceeds. Financing cash use was $4.0 million, primarily reflecting $4.1 million of share repurchases.
- Quarter-end total liabilities were $90.2 million, including operating lease liabilities; the filing reports no borrowings or debt. Operating lease liabilities totaled $14.0 million.
Material changes and management commentary
- Management attributed growth to higher GMV, new sellers, expanding existing seller programs, and a greater mix of consignment transactions. Higher recovery rates and lower operating costs supported improved gross profit and a return to net profitability.
- Technology and operations, sales and marketing, and general and administrative expenses fell year over year, partly due to COVID-related cost controls. Management cautioned that the benefit from these cuts will lessen as business conditions recover. Depreciation and amortization increased 19.0%, primarily from capitalized software development.
- Operating cash flow improved substantially, but reflected timing and working-capital effects, including extended vendor payment terms and seller payables associated with buyers delaying pickup of purchased assets. The company expects near-term working-capital use as volumes fluctuate and pandemic-related measures unwind.
- Management said liquidity and working capital were more than sufficient for projected needs and began repurchasing shares. It bought 309,496 shares under the program for $4.1 million, with approximately $2.0 million of authorization remaining at quarter-end.
- No quantitative revenue or earnings guidance was provided. Management described a longer-term focus on marketplace technology, data-driven tools, and an asset-light, low-touch model, while noting uncertainty around the pandemic’s duration and effects.
Risks, contingencies, and unusual items
- COVID-19 continues to make demand, operating conditions, and results difficult to predict. Prior trends may not hold, and foreign-exchange movements could affect reported results.
- Amazon-sourced merchandise represented 60.0% of consolidated cost of goods sold, up from 48.3% a year earlier, creating significant vendor concentration exposure. The company also notes that other seller agreements are generally terminable at will.
- The company held a $5.0 million JTC promissory-note balance: $3.4 million in other assets and $1.6 million in current assets. Repayment depends on JTC’s operating performance and ability to meet the amended schedule.
- A former HR vice president filed employment-related claims in December 2020. The company believes the allegations are without merit, but cannot estimate potential liability; its insurer accepted the claims.
- The company recorded no interim goodwill or long-lived-asset impairment indicators. The quarter included a $0.4 million benefit related to liability-classified stock appreciation rights and $0.005 million of business realignment expense. Stock-based compensation expense was $2.2 million.
Important facts for investors to verify
- Whether GMV growth and the higher fee-revenue mix persist, and how they translate into revenue, margins, and cash generation.
- The sustainability of cost reductions and profitability as pandemic-related savings unwind.
- The effects of Amazon vendor concentration and the continued availability and terms of seller relationships.
- Working-capital normalization, including seller-payable timing and inventory investment, and the collectability of the JTC note.
- COVID-19, foreign-exchange, and employment-claim developments; the filing provides no estimable range for the employment claims.