Liquidity Services Inc (LQDT) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter two, 2010 Liquidity Services, Incorporated, earnings conference call. My name is Jennifer, and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to Liquidity Services. Please proceed.

Hello, and welcome to our Q2 fiscal 2010 financial results conference call. Joining us today are Bill Angrick, our Chairman and Chief Executive Officer, and Jim Rallo, our Treasurer and Chief Financial Officer. We will be available for questions after our prepared remarks.

The following discussion and responses to your questions reflect management views as of today, May 6th, only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on form 10-K.

As you listen to today's call, we encourage you to have our press release in front of you, which includes our financial results, as well as metrics and commentary on the quarter. During this call, we will discuss certain non-GAAP financial measures. In our press release and in our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

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. The supplemental operating data includes gross merchandise volumes, or GMV and should not be considered a substitute for or superior to GAAP results.

At this time, I'd like to turn over the presentation to our CEO, Bill Angrick.

Good afternoon, and welcome to our Q2 earnings call. I'll begin the session by reviewing our Q2 financial performance and then provide context on our strategy and where we stand in our company's overall development. Finally, I will turn it over to Jim for more details on the quarter, and on our outlook for the year.

Q2 was a very productive quarter for LSI, as we exceeded our guidance range, while continuing to make important investments for the future. Q2 GMV was up 16% year-over-year to $105 million, driven by strong performance across our online marketplaces. Adjusted EBITDA of $10.2 million was up 87% year-over-year. And adjusted EPS, which excludes non-cash compensation expenses, was $0.18, up 100% year-over-year.

We are delighted that more commercial and government sellers and buying customers have discovered the efficiency of our online marketplaces, and this has helped generate strong financial results for our shareholders.

Let me briefly revisit our strategy and where we stand in our company's development. LSI was founded to bring transparency, innovation, and greater efficiencies to the highly fragmented $70 billion reverse supply chain market. To address the challenges faced by the industry, our team developed an innovative technology solution and scalable online marketplaces that uniquely address the needs of retailers, manufacturers, and government agencies.

Since our inception, we have focused on delivering a superior service to our clients and buying customers. In turn, this has allowed us to steadily develop a large, trusted, global network of sellers and buyers in many important product verticals, including consumer electronics, apparel and accessories, general merchandise, and capital assets such as store fixtures, rolling stock, and industrial equipment. Our online marketplaces have enabled sellers and buyers to transcend local marketplaces and reliably conduct transactions for valuable assets in days where previously it may have taken months.

Our focus on adding new sellers and expanding the volume sold in our marketplaces has continued to attract new buyer demand, which, in turn, attracts more sellers. Corporations and government agencies are attracted to our marketplaces, not only because it is good for business, but because it is vital to their environmental sustainability initiatives. In fact, our technology solution and global network of buyers has created new markets for used, salvage, and scrap assets that otherwise would be discarded in the nation's waste stream.

The benefits of our relentless pursuit of this strategy are clear. We have the most effective solution in the market that has attracted the largest network of sellers and buyers resulting in a very strong, competitive position. We have a proven business model with operating leverage, increasing cash flows and improving margins. And we possess proprietary data and technology solutions that add further value to our sellers and buyers, creating strong barriers to entry over time.

In summary, our strategy of bringing transparency and innovation to the reverse supply chain has translated into a valuable business franchise for our shareholders.

Next I would like to address where we stand in our company's development. At the time of our 2006 IPO, we communicated our goal of creating a $1 billion enterprise. So where do we stand? At our current run rate, we are approaching the halfway point to our initial $1 billion annual GMV target. In fact, since fiscal year 2007, we have nearly doubled our annual GMV from $233 million and doubled our annual adjusted EBITDA from $20 million. We are excited by our momentum.

Our innovative technology solution has attracted thousands of loyal government and commercial sellers, including seven of the top 10 US retailers. The reliability and convenience of our solution has attracted over 1.3 million buyers from around the world. Given our progress, our team not only has confidence that we will achieve our original goal of creating a $1 billion enterprise, but with our first [mover] advantage in focus, we have the opportunity to permanently transform the reverse supply chain market that is still in its infancy.

For example, despite our progress over the past decade, we estimate that we have captured less than 2% of this market opportunity. Like many large fragmented industries, the reverse supply chain market is still very immature and, in many instances, resistant to change. Yet, our growing roster of prestigious corporate and government clients, combined with the reach and transparency of our buyer base, is breaking down old paradigms and accelerating the pace of adoption of our technology solution for surplus goods.

Moreover, we continue to innovate and expand our offering of software tools and services to clients and buying customers who participate and transact in our marketplaces. For example, we track and monitor data associated with thousands of skews flowing through our marketplace to support the decision making of our retail and government clients regarding the management of their supply chain. The insight gain from our proprietary data is highly valuable and we believe will increase the pace of adoption of our solution over time.

We've also pursued numerous internal growth initiatives such as the redesign of the layout and search functionality in our online marketplaces, which has simplified the process for existing customers and improved the experience for new users. We expect these changes to have a positive impact on our retention and conversion rates and ability to scale our business.

In closing, we have the leading technology solution in a large, fragmented market that is still in its infancy. We continue to expand sour market share thought innovation and customer focus, which has created an increasing network effect among buyers and sellers in the reverse supply chain.

Finally, we have the financial strength and management depth to invest in future growth to create long-term value for our customers and stockholders. While we are very proud of our past accomplishments, the future is even brighter for LSI. Our entire team of associates, now over 700 strong, looks forward to working together this year to expand our business while maintaining the highest standards of integrity, service, and quality.

Now let me turn it over to Jim for a more detailed review of our financial results and outlook.

Thanks, Bill. As we indicated on our last call, we expected to resume growth in fiscal year 2010. We are pleased that more commercial and government sellers and buyers are choosing to participate in our online marketplaces. Our record quarterly results and increased guidance ranges reflect both market share gains and our continued focus on enhancing services levels and operating efficiencies across our entire business. Our strategy of bringing innovative technology to the reverse supply chain market and our efficient business model has translated into strong results for stockholders.

Trailing 12-month EBITDA has improved to $34.7 million, and trailing 12-month operating cash flow has improved to $26.8 million.

We also continue to make important investments in Q2 to support our future growth. We rolled out our new buyer user experience tools and enhancements on our Liquidation.com marketplace. These tools have resulted in improved conversion on the site among new and existing users, as well as improved auction participation. We are excited that these investments and insights have application to all of our online marketplaces, which we intend to leverage over time.

Investments in our online financial settlement software and reporting tools continue to drive an improved customer experience in our GovDeals.com marketplace for state and local governments. Adoption of our online financial settlement services has continued to increase due to the time savings and convenience experienced by buyers and sellers.

As a result, average fees for our GovDeals marketplace as a percent of gross merchandise volume, or GMV, has increased by 20% to 9% in Q2, from 7.5% in the prior year period.

We also continue to make progress in our UK business in systems and process enhancements, as well as improved product flow from our top UK retail clients, which supports our previously disclosed plan to be profitable again in the UK by the end of the fiscal year. We recently rolled out our Liquidation.com brand and technology platform in the UK, which we expect to refine and grow over time with European sellers and buyers.

Next I will comment on our Q2 financial results. Total GMV increased to a record $105.5 million, up 16% year-over-year. GMV in our US commercial business increased to a record $43 million, up 11.4% year-over-year, as a result of launching several new programs for large retailers, as we continue to drive adoption of our technology platform in the reverse supply chain market.

GMV in our scrap business increased $17.7 million, up 87.4% as a result of increasing commodity prices, and a mix shift to higher value metals. GMV in our GovDeal business was $19.7 million, up 2%, as many of our larger clients were operationally impacted by the adverse weather during the last quarter.

Total revenue increased to $75.8 million, up 27%, primarily due to one, a 25.9% increase in our US commercial business, which had a higher mix of clients utilizing the purchase model, and, two, the increase in our scrap business previously discussed.

Technology and operations expenses increased by 4.1%, to $12.2 million, primarily due to increases in staff wages, including stock-based compensation. As a percentage of revenue, these expenses decreased to 16%, from 19.6%.

Sales and marketing expenses increased by 12% to $5 million, primarily due to the hiring of additional personnel. As a percentage of revenue, these expenses decreased to 6.6% from 7.5%.

General and administrative expenses increased by 26.2% to $6.5 million, primarily due to one, $300,000 associated with increases in staff wages, two, $600,000 associated with stock-based compensation, and, three, $400,000 associated with general corporate overhead. As a percentage of revenue, these expenses were consistent at 8.6%.

The company continues to demonstrate strong cash flow generation and growth. Although we experienced a greater mix of purchase business during the quarter, we achieved record inventory turnover within our commercial business, and our overall working capital continues to be a source of cash. During Q2, LSI generated $12.2 million of operating cash flow, up 116% over the last 12 months. LSI has generated $26.8 million of operating cash flow.

Adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA, grew 87.3%, to a record $10.2 million. Our investments in improving service levels and operating efficiencies have enabled us to expand our margins. Adjusted EBITDA margins improved sharply to 13.5% in Q2, from 10% in the prior year period based on revenues, and to 9.7% from 6.9% in the prior year period based on GMV. These efficiency gains have driven strong results for shareholders, as we generated $34.7 million of adjusted EBITDA over the last 12 months.

Adjusted net income grew 96.6% to a record $4.9 million and adjusted diluted earnings per share grew 100% to a record $0.18, from $0.09 in the prior year period, based on approximately 27.2 million and 28 million diluted weighted average shares outstanding respectively.

The company continues to have a strong balance sheet. At March 31, 2010, LSI had $68.5 million of cash, or approximately $2.50 per share in cash, current assets of $100.1 million, and total assets of $146.8 million. The company continues to be debt free.

Capital expenditures during the three months ended March 31, 2010 were $1.1 million. We expect capital expenditures to be $4 to $4.5 million for the fiscal year ended September 30, 2010.

Management is providing the following guidance for the next quarter and fiscal year 2010. We expect GMV for fiscal year 2010 to range from $360 to $400 million. We expect GMV for the fiscal third quarter of 2010 to range from $90 to $100 million.

We have recently launched several programs with large commercial clients, which we expect will partially offset the seasonality that we typically experience in our commercial business during the June and September quarters. Our guidance also reflects that we do not expect to continue to receive the same volume of high-value rolling stock or the same mix of more valuable metals such as Inconel, brass and copper, under our surplus and scrap programs respectively.

We expect adjusted EBITDA for fiscal year 2010 to range from $31 to $35 million, which is an increase from our prior guidance range of $26 to $30 million. We expect adjusted EBITDA for the fiscal third quarter of 2010 to range from $7 to $9 million.

We estimate adjusted earnings per diluted share for fiscal year 2010 to range from $0.52 to $0.60, which is an increase from our prior guidance range of $0.40 to $0.48. For the fiscal third quarter of 2010, we estimate adjusted earnings per diluted share to range from $0.11 to $0.15.

This guidance reflects the recent impact of our stock repurchase program under which we repurchased 309,956 shares for approximately $3.8 million during the last quarter. However, it does not assume that we will continue to repurchase shares under the program.

On February 2, 2010, the company's Board of Directors approved an additional $10 million for the share repurchase program, resulting in $7.2 million currently available.

Our guidance suggests EBITDA and diluted EPS for the effects of stock-based compensation, which we estimate to be approximately $2 to $2.5 million per quarter for the remaining two quarters of fiscal year 2010. The company expects its trends of increasing stock-based compensation costs to moderate in fiscal year 2011.

Bill and I will now answer any questions.

(Operator Instructions) We will now pause for a moment to compile a list. (Operator Instructions) Our first question comes from the line of Brian Nagel with Oppenheimer. Please proceed.

Hi. Good afternoon. Congratulations on a nice quarter.

Thanks, Brian.

Guys, the one -- I just wanted -- the one question I had with respect to the GMV guidance you guys provided, [you include] -- we had the GMV top tier guidance here in Q2. But if I look at the guidance, if my math's correct, it actually seems that you could be model -- you could be forecasting at least at the low end of that guidance towards a decline the second half of two thousand -- second half of the year. So it's -- is there something that -- is that how we should be thinking about the guidance? Or is it just being conservative, given the environment? That's my question.

So, Brian, a few things. One, as you're aware, we do have seasonality in our business, particularly the March quarter tends to be one of our stronger quarters of the year. We see a slight drop in June, historically. And then September is maybe flat or picks up a tad over the June quarter. And so we have modeled that into our business and the guidance.

I would tell you that we do expect, again, the commercial business to be down over the next two quarters compared to this quarter, again due to seasonality, although not to the extent that we saw last year, due to the new programs that Bill mentioned earlier.

On the surplus and scrap side of the businesses, we also had an extremely strong quarter in both parts of those businesses last quarter, frankly, due to some high-value rolling stock that we got, primarily trucks, vehicles, and transportation equipment from the DoD. We don't expect that trend to continue. It's possible, but, again, we're not putting it in our guidance.

On the scrap side of the business, we had almost a $2 Inconel sale, so we're not anticipating that again, as of right now. We haven't seen any of that, any Inconel turned into us for that quarter. So we're removing that from our forecast as well as not anticipating the stronger mix we had last quarter of brass and copper products.

And let me just add some perspective on the macro economy. Obviously, I think many folks running businesses, they'll understand that the nascent recovery in consumer spending and business investment is still early and fragile. And let's remember what the retail economy has been through over the past 18 months.

There was a reset in the retail supply chain, which has meant that on a same-share basis, volumes within our larger retail accounts have been down year-over-year. With this early recovery underway, we do anticipate accelerating growth in our commercial business over time due to at least three factors. One, retail volumes are expected to improve on a same-share basis within our large retail accounts, as the overall retail business improves. So as we get some GDP growth and some job recovery, we expect more volume to be sold at these channels and that will buoy our business, excluding any market share gains.

Certainly, second, we expect to increase our market share within our mature existing accounts, as well as newer accounts, some of which are in the very early stages of being rolled out, and it is typical for us to start with a new client in one area and grow over time.

I think, finally, we are seeing more activity in the marketplace as a whole among larger organizations seeking new solutions in the reverse supply chain. And as those come into view, Brian, and we win new business, we'll certainly factor that into the guidance. But I would say just as a qualitative remark, there is increasing interest among large retailers online and offline, for innovation and new solutions in the reviews supply chain.

That's very helpful. And just one follow-up. Looking specifically at the commercial business, we saw results in most retailers it was definitely acceleration into March from February and January. Would that -- is that consistent with the trends you saw intra-quarter in your business?

Yes.

I think if you look at the data, March, by and large, was a very strong month. I think Easter fell a little earlier this year and [fell] -- that was part of a strong end to that quarter.

And would you comment on business since quarter end? So what we've seen so far here in the third quarter?

Well, I think we have had some setup of some new programs. And there's an incremental allocation of some of our resources on preparing and setting up some new programs that -- while expending the energy didn't result in a lot of volume in April. And we think as we move through the quarter, we're going to be seeing the benefit of that.

Sounds good. Thanks a lot. Good luck for the next quarter.

Thank you.

Our next question comes from the line of Shawn Milne with Janney Capital Markets. Please proceed.

Thank you, and good afternoon. And congratulations on probably the best quarter I've seen as -- since we took you public several years ago. Just trying to go back to that guidance question as well. I guess, Jim, it feels like -- so do you believe you've got a scrap number in your model that if we do get a continued slide in commodity prices, you feel good about that? I guess so having fairly tempered scrap estimates in your model. And then, secondly, on -- in terms of commercial, we saw the April data was a little bit slower at about 5% growth. Do you think that's more of just a touch comp in April, or, perhaps, it was -- a piece to that was the Easter shift, and would you expect it to sort of pick up the year-over-year growth as we go through the quarter? And then maybe one more for you, Jim, just on the margin side. The margins were much better than expected this quarter. I certainly feel like it's because of the scrap upside. But can you talk about the margins that you're seeing in the commercial segment? Are we really turning the corner there?

Sure. So, Shawn, you had three questions there. Let me take question one and three, which was on the scrap and in the margins, and I'll turn the trends in the commercial business over to Bill.

So on the scrap side, yes, we, as I indicated answering Brian's question, we do anticipate the scrap business being lower next quarter than last quarter, mostly, again, out of what I would say product mix. So we have provided for that in the forecast, and, hence, why you've got a lower range on the top line than we delivered this quarter.

On the margin side of the business, we have seen margins improve throughout all the marketplaces. I would say they were a little stronger than expected this quarter, primarily, again, because of the mix, as you mentioned, some of it on scrap, but it was mostly due to the capital asset side of our business where we received a lot of high-value specialty equipment that, by nature, just has better per sale margins.

Specifically on the commercial business, we do expect margins to continue to improve in that business as we move forward and get greater scale. We still are not fully utilizing our distribution center network. We've got capacity in that network. Bill talked about the inventory turns in his comments. And, frankly, we're very pleased with the operational efficiencies and throughputs, but we've got the capability to run a lot more product through our facilities, and that's really our goal and what should drives margins in the next several quarters.

Yes. And let me just comment on April. I think March has one or two more business days than April, so have to factor that in. Certainly there was sort of a pent-up demand that was underway as we get out of February. So I think across the board, both -- we saw it on the reverse supply chain. I think retailers benefited from that. Perhaps the holiday falling in March helped a bit.

I think we are expecting to see improvement throughout the quarter. Certainly, we've gotten farther along with some new programs that were requiring some focus and attention during April, that are now up and running, and that's likely to bear out, and GMV accelerating as we move through the quarter. This is a marathon. We are looking to change old paradigms and win mandates and improve our market share. And in the early days of some of these new programs, we're going to invest whatever we need to do, whether it's technology integration, account management. We've literally had people embedded in client locations, in some instances, to understand their needs. So we're not concerned about April, and we're very sanguine about the overall opportunity.

Yes. I wonder if I can follow up on that. That's a good segue to more of a philosophical question. I mean, you have very strong EBITDA margins. But I wonder, Bill, if there's a tradeoff where you might be able to lower your fee structure to get more interest from large retail clients. I'm surprised to hear you talk about a plus or minus on the GDP when we believe the liquidation market's a $60 billion opportunity and, if, indeed, you have a good service for large retailers, then you're only scratching the surface of what this company could be. You wonder if you -- your services levels have gone up, your technology's improved. I wonder if you have thought, perhaps, not maximizing margin, but necessarily, maybe giving a little bit back to your customers and driving faster growth which drives better operating efficiency. I guess long-winded comment of maybe bringing some of the Amazon discipline into your business to accelerate growth. Any thoughts?

So let me point out just a couple things. I think philosophically we understand that the bigger our marketplace is, the more efficient it is for all the participants. And over time you unlock more value for clients who sell through the marketplace and buyers who just have more breadth and depth of products. And who suffers is really the intermediary who's not adding any value in the supply chain. And that's happening.

And on a product category-by-product category basis, we have looked at variable pricing to establish a greater penetration in terms of share. There are lots of reasons one would consider the total supply chain cost of an item, high-value item versus the low-value item, and make sure that economics work for our sellers and our buyers.

When we made reference to same-store sales changes, we just wanted to make sort of the mathematical point that with some of our clients, we might have 25%, 30% penetration of their business, which is still a relatively small absolute number, but relative to our business, if that client is having year-over-year decline in their business on the same share that we have, we're getting less product, and, in some instances, less product with prices that have declined. So it's not a reflection on the efficacy of our model, it's more a reflection on how those clients are behaving in an economic downturn.

The broader opportunity to gain share is the focus. We will look at pricing and value for clients as part of that expansion of share. And over time that increasing scale benefit of serving the largest network of buyers and sellers, will more than compensate LSI for any variation in our price point. So I think you're striking a chord that we agree with, Shawn.

Okay. Well, that was a good quarter. Thank you.

Yes.

(Operator Instructions) Our next question comes from the line of Heath Terry with FBR Capital Markets. Please proceed.

Great. Thanks. I was wondering if you could give us just a little bit more color into the customer adds on the commercial side during the quarter and kind of what the pipeline looks like for this quarter going forward.

Sure. Well, when you look at the target for our business, Heath, it is Fortune 500 retailers and the vendors who supply them. I believe there is a reference to the broad landscape of new accounts within our investor presentation that's on our corporate website. But essentially leading big box retailers, specialty retailers, online retailers, all of whom view the returns, management, product flow, and process as non-core, and we've got more than a dozen new mandates with these companies to bring a technology solution to their supply chain to replace manual negotiated sales to local jobbers or liquidators and to deliver more value.

And in some instances that's requiring us to export the product out of the United States. That's one of the benefits of having an integrated marketplace with the UK. Jim made reference to us introducing the Liquidation.com brand and technology platform there. That'll be quite helpful over time. We also have an operation in the UK with a network of buyers that rely on our logistic support there. So we feel that we've got an increasing roster or reference clients that we are becoming a well-known brand within the supply chain community and that we are becoming a best-in-class provider that over time will allow us to increase the pace of adoption of our online marketplace.

Great. And I think it was last quarter you said you were at a total of 475 commercial customers. Where's that number now?

So, Heath, yes, that number is about the same this quarter.

Okay.

As you know, most of that number is made up of our small and medium-size clients. So most of our larger clients are basically shown on our investor page -- investor presentation, and that has changed a little bit since the last quarter. But for the most part, that number has been consistent for the last two quarters, with the small and medium-size guys.

Okay. And any sense on what he pipeline looks like there? We saw 25 new customers added last quarter, and I know you talked about your expectations for the business as a whole being kind of flat over the coming quarters. Same thing on the customer count side?

Well, we do expect to grow the customer account, Heath. I mean, we make investments in our team to support the, what we call our middle-market accounts. So we'll constantly have a pipeline for that. And, again, our expectation is that that will grow along with the rest of the business.

I think one of the things that you will see as part of the new buyer experience and functionality on Liquidation.com is a rating system which tracks key performance indicators for each seller, and this was particularly relevant for the small and middle-market sellers. It tracks how long it takes a seller using our platform to ship. It tracks what the accuracy was of what was sold and the repeat buyer rate for those items. And, therefore, it gives sellers an opportunity to distinguish themselves as a very highly regarded source of supply for our buyers. Or in some instances, sellers realize that because they are now dealing in a very transparent marketplace, they may not have a business that fits within our service level requirements. And if that's the case, we either ask them to drop off the platform to preserve the highest quality experience for our buyers, or they do so on their own.

There's a little bit of noise in the number that you were referencing that we publish in our Q, and it shouldn't diminish the fact that we are making a lot of gains with that middle-market client base.

Great. Thank you.

(Operator Instructions) At this time, it appears we have no further questions.

Okay. Thank you very much, everyone, for joining our call. Jim will be available to answer questions afterwards. Thanks again for your participation.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.