Liquidity Services Inc (LQDT) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2008 Liquidity Services Inc. Earnings Conference Call. My name is Betsy, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

I would now like turn the presentation over to your host for today's call Ms Julie Davis, Director of Investor Relations. Please proceed, ma'am.

Thank you. Good afternoon, and welcome to Liquidity Services Inc. earnings release conference call for the fiscal first quarter 2008 and the three months ending December 31, 2007. During this call, we will refer to Liquidity Services Inc. as LSI. Presenting today are Bill Angrick, our Chairman and CEO, and Jim Rallo, our Treasurer and CFO.

This conference call is also being broadcast through the Internet and is available through the Investor Relations section of the Liquidity Services Inc. website. Before we begin, I would like to remind you that matters discussed on this call contain forward-looking statements that involve risks and uncertainties concerning LSI's expected financial performance, as well as LSI's strategic and operational plan.

These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control.

These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future, and we undertake no obligation to update these statements after this call.

Please refer to our SEC filings, as well as our current earnings release posted a few minutes ago on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

To supplement the Company's consolidated financial statement presented in accordance with GAAP, we use certain non-GAAP measures. These non-GAAP measures include EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS. We believe these non-GAAP measures provide useful information to both management and investors.

These measures, however, should not be considered a substitute for or superior to GAAP results. Our reconciliation of all non-GAAP measures included in this conference call to the nearest GAAP measure can be found on the financial tables included in the press release.

We also use certain supplemental operating data as a measure of certain components of operating performance, which we also believe is useful for management and investors. This supplemental operating data includes GMV and should not be considered a substitute for, or superior to, GAAP results.

At this time, I would like to turn the presentation over to our CEO, Bill Angrick

Good afternoon. As detailed in our press release, Q1 reflected solid results as we reported record GMV of $67.6 million, while positioning LSI to gain market share in both our commercial and public sector businesses. During the quarter, overall GMV grew 27% year-over-year, and 17% sequentially.

And, Adjusted EBITDA grew 27% year-over-year. There were several highlights from the quarter. GMV in our scrap business grew 58% year-over-year, and 48% sequentially. GMV in our commercial business grew 43% year-over-year, and 13% sequentially. While GMV from our commercial consignment business grew 26% sequentially, our buyer marketplace continued to deliver strong results for our sellers, as a number of auction participants increased 31% year-over-year, to a record 323,000 during the quarter.

This represents the largest quarterly growth in auction participants we have recorded in the last three years. We also completed a record 63,000 transactions during the quarter, representing a 29% year-over-year increase. During the quarter we also generated operating cash flow of $7.3 million, reflecting the strength of our underlying business model. Overall, we are very pleased with our ability to grow the volume of our business and generate strong free cash flow, even amidst a weakening economy.

Recent strong trends in GMV give us confidence in the progress we are making in scaling the size of our marketplace. In the current economic environment, we believe LSI is well positioned to increase the size of our commercial marketplace and expand our market share position. Our GMV trends reflect the fact that we have been successful at growing our volumes with existing customers in our commercial business.

We are continuing to expand a number of product categories and locations we serve on behalf of our clients. We continue to receive strong interest from national retailers and manufacturers for our turnkey solution to recover value for reverse supply team merchandise, such as customer returns and overstocked goods.

We are also now handling new product categories, such as material handling equipment, as our clients upgrade equipment in open or closed facilities. We believe our large volume buyers and value added services are important competitive advantages to meeting the needs of our clients. In particular, we believe our national distribution center network is an important asset that minimizes shipping and handling costs for both our sellers and buyers.

LSI's strategic mission is to develop the largest and most efficient online marketplace to enable commercial and public sector clients to transact wholesale surplus and salvaged goods. In support of this mission, we have identified a number of near term priorities and investment initiatives that will maximize our long-term growth and competitive advantages in this marketplace.

During the last quarter, we established and filled a new Vice President of Account Management position, overseeing all of our commercial relationships. This new position is responsible for overseeing and managing the delivery of our services to our commercial clients, including establishing joint operational plans to further expand our business with each client account.

As part of this initiative we are developing additional tools and processes that will enable our account management teams to operate more efficiently and improve inventory turnover as we increase the volume of our commercial business.

During the last quarter we also established and filled a new Vice President of Marketing position, and expanded the size of our marketing team. Under the direction of this expanded team we plan to increase the branding and promotion of our commercial marketplace, both domestically and internationally to expand the demand side of our business.

Finally, we are planning to integrate our acquired Southerntextile.com marketplace with and into our Liquidation.com marketplace. Going forward we expect this to result in a higher payoff for our branding initiatives, as well as an improved buyer/customer experience. We believe these actions will result in improved efficiencies in our commercial business over time.

Another important strategic goal we have is further diversification of our business. Our strong organic growth, combined with our recent acquisition of GovDeals, have resulted in a stronger and more diversified business, by market segment and pricing model.

Our acquisition of GovDeals, which was completed in January, has provided LSI with a strong platform to accelerate our growth in the state and local public sector marketplace, which we size at approximately $2 billion in annual GMV potential. In addition, pro forma for the GovDeals acquisition approximately 80% of LSI's GMV will consist of clients utilizing our consignment and profit-sharing models, and approximately 20% utilizing our purchase model.

At this time, I will turn over our presentation to Jim Rallo, our CFO and Treasurer.

Thanks, Bill. Our company continues to experience strong top line growth as we again achieved our target of 25% or greater Gross Merchandise Volume, or GMV, growth this quarter. The amount of GMV transacted through our marketplace increased $14.4 million, or 27% to $67.6 million for the three months ended December 31, 2007, from $53.2 million for the three months ended December 31, 2006.

We believe this increase is attributable to our investment in our sales and marketing organization, which resulted in 41.4% growth in our commercial marketplace over the same period last year. In addition, our scrap business which generated 33.2% of our revenue and 29.2% of our GMV for the three months ended December 31, 2007, grew 57.5% from the three months ended December 31, 2006.

The growth of our commercial and scrap businesses is partially offset by a 5% decrease in our surplus business, as a result in the re-engineering of certain inventory processes from the three months ended December 31, 2007, compared to the three months ended December 31, 2006.

Revenue increased $14.1 million, or 31.2% to $59.3 million for the three months ended December 31, 2007, from $45.2 million for the three months ended December 31, 2006. This increase is primarily due to the items driving GMV growth.

Cost of goods sold, excluding amortization, increased $6.9 million, or -- I'm sorry, 82%, to $15.4 million for the three months ended December 31, 2007, from $8.5 million for the three months ended December 31, 2006. As a percentage of revenue, cost of goods sold, excluding amortization, increased to 26% for the three months ended December 31, 2007, from 18.7% the three months ended December 31, 2006.

These increases are primarily due to an increase in the volume of goods sold at our marketplace by existing sellers utilizing our purchase model, and ramp up in volume with existing sales programs which resulted in lower inventory turnover, and a mix shift to apparel items, which realized a lower margin during the three months ended December 31, 2007.

Profit sharing distributions increased $2.1 million, or 11.1%, to $20.8 million for the three months ending December 31, 2007, from $18.7 million for the three months ended December 31, 2006. This increase is a result of the 57.5% growth in our scrap business during the three months ended December 31, 2007, compared to the three months ended December 31, 2006.

As a percentage of revenue, profit sharing distributions decreased to 35.1% for the three months ended December 31, 2007, from 41.5% for the three months ended December 31, 2006. This decrease is a result of the decrease in the amount of profits we are required to pay the DoD under our surplus contract which was modified December 12, 2006, as well as the scrap contract which was modified on June 1, 2007.

Technology and operations expenses increased $2.2 million, or 27.2%, to $10 million for the three months ended December 31, 2007, from $7.8 million for the three months ended December 31, 2006.

This increase is primarily due to the addition of 92 technology and operations personnel, the majority of whom are needed to support the increased volume of transactions and merchandise discussed above at our commercial business, and an additional 64 operating personnel who are needed to support our inventory shortage program under the surplus contract.

As a percentage of revenue, these expenses decreased to 16.8% for the three months ended December 31, 2007, from 17.4% for the three months ended December 31, 2006. This decrease resulted from our growth and revenue while averaging our fixed expenses such as programming personnel.

Sales and marketing expenses increased $1.1 million, or 39.4%, to $4.1 million for the three months ended December 31, 2007, from $3.0 million for the three months ended December 31, 2006. As a percentage of revenue, these expenses increased to 7% for the three months ended December 31, 2007, from 6.6% for the three months ended December 31, 2006.

These increases were primarily due to our hiring of 21 additional sales and marketing personnel, and $200,000 in increased expenditures on marketing and promotional activities across our marketplaces.

General administrative expenses increased $1.4 million, or 40.8%, to $4.8 million for the three months ended December 31, 2007, from $3.4 million for the three months ended December 31, 2006. As a percentage of revenue, these expenses increased to 8.2% for the three months ended December 31, 2007, from 7.6% for the three months ended December 31, 2006.

These increases were primarily due to one, cost of $700,000 related to additional accounting, legal, insurance and compliance and other expenses to support our growth; two, expenses of $300,000 related to the adoption of statement 123R; and three, costs of $200,000 for travel and related expenses associated with business development efforts.

The Company continues to have strong cash flow generation and growth. LSI generated $7.3 million of operating cash flow in the three months ended December 31, 2007, an increase of $4.6 million, or 165.5%, over the $2.7 million generated during the three months ended December 31, 2006.

Adjusted earnings before interest taxes depreciation amortization, or Adjusted EBITDA, increased $1.1 million, or 27.4%, to $5.2 million for the three months ended December 31, 2007, from $4.1 million for the three months ended December 31, 2006.

Adjusted Net Income increased $500,000, or 19.2%, to $3 million for the three months ended December 31, 2007, from $2.5 million for the three months ended December 31, 2006.

Adjusted Diluted Earnings per share increased $0.02, or 22.2%, to $0.11 for the three months ended December 31, 2007, based on $28.1 million diluted weighted average shares outstanding, from $0.09 and $28.4 million diluted weighted average shares for the three months ended December 31, 2006.

I will now discuss the Company's other key operating metrics, as I have already touch on GMV which management believes allows us to monitor the success of our marketing programs, as well as our [lotting] and merchandising strategies.

During the last 12 months, we also benefited from our ability to more effectively market assets of potential buyers. Our marketing efforts resulted in approximately 28.1% increase in registered buyers to approximately 724,000 at December 31, 2007, from approximately 565,000 at December 31, 2006.

Auction participants, which consist of registered buyers who have bid on an auction during the period, and are counted more than once if they bid in more than one auction, increased to a record 323,000 for the three months ended December 31, 2007, representing an increase of 76,000, or approximately 30.7%, over the 247,000 auction participants for the three months ended December 31, 2006.

Completed transactions increased 28.7% to approximately 63,000 for the three months ended December 31, 2007, from approximately 49,000 for the three months ended December 31, 2006. Our growth and completed transactions was achieved while maintaining strong liquidity in the marketplace, as the three months ended December 31, 2007, was our ninth consecutive quarter achieving on average greater than five auction participants per transaction.

The Company continues to have a strong balance sheet. At December 31, 2007, LSI has $68.4 million of cash, current assets of $94.2 million and total assets of $116.6 million. The Company continues to be debt free, with current liabilities of $29 million, long-term liabilities of $2.2 million, for total liabilities of 31 --

Hello? Pardon the interruption. [Chad] are you on the line. Hello, is anybody on the line. This is an operator. Hello?

The management team is providing the following guidance for the next quarter and fiscal year 2008. The following forward-looking statements are based on current business trends and our current operating environment including, one, an increased volume of apparel in our product mix which is anticipated to carry lower margins.

Two, continued less than optimal inventory turnover within our commercial marketplace during the next quarter as we ramp up volume with existing commercial sellers. Three, increased spending in sales and marketing. And four, our belief that we have yet to realize the full potential of our distribution center network, personnel, and value-added services necessary to support a much larger commercial business in the future, which has resulted in less than our target profitability.

Our results may be materially affected by changes in business trends and our operating environment, as well as by other factors, including investments we expect to make in our infrastructure and value-added services to support new business in both commercial and public sector markets.

Our Scrap contract with the DoD includes an incentive feature, which can increase the amount of profit sharing distribution we receive from 23% up to 25%. Payments under this incentive feature are based on the amount of scrap we sell for the DoD to small businesses during the preceding 12 months as of June 30th of each year.

We are eligible to receive this incentive in each year of the term of the Scrap contract, and have assumed for purposes of providing guidance regarding our projected financial results for fiscal year 2008 that we will again receive this incentive payment. Under our Surplus contract there are incentive features that allow us to earn up to an additional 4.5% of the profit sharing distribution above our base rate of 26%.

This incentive will be measured quarterly during fiscal year 2008. For the purposes of providing guidance regarding our projected financial results for the second quarter and fiscal year 2008, we have assumed that we will receive a portion of the Surplus contract incentive payments.

Our guidance adjusts EBITDA and Diluted EPS for the effects of the adoption of FAS 123R, which we estimate to be approximately $1.2 million to $1.4 million per quarter for the remaining three quarters of fiscal year 2008.

We expect GMV for fiscal year 2008 to range from $320 million to $330 million, which is an increase from the $285 million to $295 million range provided last quarter, as a result of the GovDeals acquisition. We expect GMV for Q2 2008 to range from $78 million, to $80 million. We expect Adjusted EBITDA for fiscal year 2008 to range from $24.5 million, to $25.5 million.

We expect Adjusted EBITDA for Q2-08 to range from $5.2 million, to $5.4 million. We estimate Adjusted Earnings Per Diluted Share for fiscal year 2008 to range from $0.51, to $0.53. In Q2 2008, we estimate Adjusted Earnings Per Diluted Share to be $0.11.

I will now turn our discussion back over to Bill.

Thanks, Jim. In closing, this is a busy time for LSI. According to the National Retail Federation, one in three shoppers returned an item following the holiday shopping season.

LSI is well-positioned and able for our customers to recover more value for this reverse supply team merchandise and reduce costs related to storing, handling and managing these surplus goods. Our strong operating cash flows and balance sheet will provide LSI the financial flexibility to continue to invest for future growth, both organically and via acquisitions.

Thanks for your time and attention today, and we look forward to answering your questions at this time.

(OPERATOR INSTRUCTIONS)

Your first question comes from the Shawn Milne of Oppenheimer. Please proceed.

Good afternoon. Shawn Milne. A couple of questions. Let me just start off on the margin side, Jim. COGS was about $1 million higher than what we were looking for. Is there a way for you to break out a little bit further the impact from inventory turns?

Maybe you can describe that a little bit better, given the fact that commercial business actually picked up, and, the impact from apparel margins. And my second question that we can come back to is, after this kind of GMV in Q1, your Q2 guidance is $78 to $80 million, how much of that is from GovDeals?

And, Bill, maybe you can chime in and give us an update on what you are seeing in commercial right now because that guidance seems a little bit light if you take out GovDeals. Thanks.

Well, let me take the first two questions, Shawn, which were the Cost of Goods Sold and then the amount of GMV from GovDeals. On the Cost of Goods Sold, basically the apparel margin issue resulted in pretty much the entire $1 million in our Cost of Goods Sold.

We pushed a significant amount more apparel through our marketplace as we ramped up with a handful of sellers that have been pushing more apparel to us. Now, the resulting lower inventory turns are because if you notice actually from the break out in the GMV table in the press release that we had significant growth in our consignment business over the quarter.

In fact, our consignment business was really responsible for all of the GMV growth in the commercial marketplaces this quarter. The purchase model on an absolute dollar basis was fairly flat, only growing about 2.5% to 3%.

On the GovDeals GMV, we gave earlier guidance that we expected to have $30 million to $35 million of GMV for the nine months ended September 30. I say nine months because that acquisition was closed in early January. The March quarter is actually the weakest quarter for that business, Shawn.

Mr. [Schwartz], are you there please? Please check your mute feature.

-- the March 31 quarter. So if you take that $30 million or $35 million and you were to come up with a monthly GMV, the first three months of that would be lower final six months of the year, and that is why the GMV guidance for Q2 is reflected the way it is.

Relative to the commercial marketplace and opportunities, I think that we have anticipated continued demand for our services and that is what we are experiencing. The fact that we have made some meaningful new hires in commercial business is to support this ongoing growth.

I think the depth and maturity of our team supporting the commercial business is improving and it is certainly better able to manage the growth that we are experiencing. I think the new VP of Account Management and VP of Marketing positions that came onboard last quarter are leading a number of important issues to improve the operational execution across our commercial business.

In this environment I think large retailers are looking for reputation and quality of their service providers. I think in leaner economic times these companies kind of go back to basics and focus on their core business which is their forward retail supply chain activities, and that gives us an opportunity to step in and really shine as a best practice for managing the sale of returned and excess inventory. So, we think the current environment is favorable for LSI.

Two quick follow-ups. You seem to indicate in your guidance that margin is going to improve in the back half of the year. It sounds like to me though, if it is apparel for some reason intrinsically carry different margins, why would you expect that to go away?

And then secondly to follow up with Bill, there has been some indication at least from our side of the business that someone was suggesting the commercial business was down year-over-year in January. We certainly don't view it that way. Can you give us a little more color on the current strength of commercial in January? Thank you.

Sure, I think just a couple (inaudible) of our approach. Our contracts with clients, in particular the ones involved with apparel, [are] contracts involved with the receipt and sale of apparel, along with other product categories.

So these programs have a regular review of the services and rate cards as part of our contract. And, the reason for that is it allows us to address issues such as product mix shift as you move through time. So, we think we are able to protect our margin structure over time as a result of these rate cards and the resetting of those cards.

As far as the commercial vibrancy, heading into this current quarter, we feel we had a very good January, and that GMV is up roughly 40% year-over-year in line with our guidance during the month of January.

Okay, thanks.

Your next question comes from Colin Sebastian from Lazard Capital Markets. Please proceed.

Good afternoon. Thanks for taking my question. I guess the first one, maybe another point of clarification. Would it be correct to say that some of the incremental investments that you are talking about are because you have seen an enhanced opportunity in this environment with perhaps a weaker consumer to bring on new business?

And then the second question is related to the surplus business. How much of an incentive payment did you record in Q1 results? And in terms of renewal of that contract, what is the current status of that situation? Thank you.

Sure. We have invested to sustain continued growth in the commercial business. You can see it in the depth of our management team in creating a layer of vice president level and director level positions. We think that in the foreseeable future, LSI is an opportunity to increase its market share.

We think, and we have observed, smaller folks in the market may have a tough time in light of economic conditions, and I think smaller competitors are weaker as larger competitors are looking for certainty and quality and long-term solutions, that favors LSI.

As far as the DoD surplus contract, our belief is that the DoD intends to issue a new RFP, and we are prepared to respond to a new RFP. And, to the extent that they require any additional service while they are undertaking the new RFP process, and if they were to approach us to extend our services I am sure we would take them up on it.

As far as the amount of incentive recorded for surplus, Colin, we did again achieve the maximum this quarter, December 31, 2007. So we are at the 30.5% limit. We are not disclosing the specific dollar amount, but I will tell you it is proportional to the $1.5 million that we recognized for all of last year. So it was several hundred thousands of dollars.

Okay, just one follow-up on the surplus renewal. How long would you expect the RFP process to last? Thank you.

Well, that is pure speculation. I can tell you from our experience with the current commercial venture two process, it was an 18 to 24 month process.

Okay, thanks.

Your next question comes from Scott Devitt from Stifel Nicolaus. Please proceed.

Thank you. The first question is, I was wondering if the GovDeals GMV is going to flow through surplus scrap or be a separate GMV segment. And secondly, I was just wondering if you would comment on the proposed GSA changes to the regulations surrounding the disposal surplus equipment. I noticed you hired a lobbyist and from reading the GSA documentation, it wasn't really clear what you are trying to influence there. Thank you.

Well, let me discuss the fact that, as a Washington, DC based company, working with public sector clients since our inception that we have had an active public affairs program since we started the business. We have utilized Patton Boggs off and on for eight years so their role is not new to the Company.

With respect to GSA, as you would know, GSA has oversight and responsibility for Federal real and personal property management. And, GSA has been reviewing [Federal asset] sales from at least the mid-90's. The GSA role, frankly, for us is a positive role because it is designed I think in light of Bush's e-Gov initiatives to determine how federal agencies can improve their management and sale of personal and real property.

And, part of that role is to evaluate on what basis the government can partner with the private sector to drive best practices and improve results. In fact, Liquidity Services holds a contract with the GSA to offer our solutions to all federal agencies. So, we are positioned to work with any of the federal government agencies to sell surplus personal property.

As to their views on policies and approach, we are not part of that, but I think we are an important symbol of how the private sector has worked successfully with the government to improve surplus property programs.

You may have seen that at the end of 2007, we received a national award for work with the District of Columbia and moving their sales to an online marketplace. So, if there is a discussion of how can you use e-commerce to bring value, we want to be part of that discussion.

And there was a second question about GovDeals GMV and how that flows through our tables.

I just have one thing as far as the specific [lobbying] question, Scott. We have been working with the folks at Patton Boggs now for over 18 months. That disclosure was basically not a timely disclosure for them. This is a normal course for someone that works with the government.

The GovDeals, we'll probably break that out in a separate bucket either state local government consignment or call it GovDeals separately. We haven't quite figured that out yet, but that is our thinking right now so you guys will be able to track it.

That is helpful. Thank you.

Your next question comes from Steve Weinstein from Pacific Crest. Please proceed.

Thank you very much. Just a couple of questions for you. One, in regard to the December quarter, you exceeded the top line of the GMV, your guidance. It seems like you were a little light on the EBITDA there. When you gave guidance for it, there's only three weeks left in the quarter.

Now we think about businesses having a couple of weeks' visibility. So, I am wondering if something has changed there on the visibility front, or anything else that would have caused the discrepancy between the guidance and what was actually reported. That would be my first question.

The second one is, I'm looking at the guidance for '08. It looks like you are raising the guidance by about $30 million to $35 million here. But if I look at the upside from the quarter and the $30 million to $35 million expected from the acquisition, it is not clear if you are maintaining or slightly lowering your expectations for the rest of the business.

I wonder if you could clarify that, and then I got -- [I apologize] because I got cut off when you were going through that explanation. And then finally, for the March quarter, can you talk about linearity trends for the commercial business? And, should February be better than January, and March be better than February, or are they about even? How should we think about that for those of us who track it?

Let me tackle most of those for you, Steve. First off, when we gave guidance which was early December, we certainly had a fairly good outlook on the quarter and we were again in our guidance range on profitability ahead on the GMV.

And, one of the reasons we were ahead on the GMV is about December 12 or 13, somewhere around there, I'd have to get you the exact date, we had a huge inconel sale under the scrap contract which we did not have visibility on at the time we were giving guidance.

It was actually almost $3 million, one of our biggest scrap sales ever. So that is really what pushed us over the top there on GMV, Scott. And, again, I think the margin issues we have touched base earlier via the comments and earlier questions from Shawn.

As far as the GMV goes, I know we don't see a declining GMV from, if you would, the core business. We are simply mathematically adding the GovDeals on. So, we do expect scrap to come down slightly, if you would, from this quarter. This was a record quarter by far.

Our last highest quarter was $15.7 million on scrap, just pulling out the inconel sale, still above that. We think scrap is really kind of run rating somewhere between the $15.5 million and $16 million type of quarter.

Okay, and can you talk about the linearity of the commercial business?

I'm sorry; can you say that again, [Scott]?

It's Steve. The linearity in the commercial business. We have our measure --

I'm sorry. January, February, and March. Well, February although not quite short of a month with the leap year, should be a little stronger than January just because you are still dealing with the holidays at the front end of January. March will definitely be our strongest month of the quarter by far.

Okay. Thanks a lot.

No problem, Steve, thank you.

(OPERATOR INSTRUCTIONS)

There are no questions at this time. Back to you, sir.

We appreciate your participation on the call. If there is any additional information, Jim will be available for follow-up right after this call. Thank you.