Liquidity Services Inc (LQDT) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q4 and fiscal year 2010 Liquidity Services earnings conference call. My name is Keith, and I'll be your operator for today. At this time all participants are in a listen-only mode mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Keith.

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

The following discussion or responses to your questions reflect management views as of today, December 2, 2010, 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 in 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 result 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 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. This supplemental operating data includes gross merchandise volume and should not be considered a substitute for, or superior to, GAAP results.

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

Thanks, Julie. Good afternoon and welcome to our Q4 earnings call.

By the way, we are pleased to welcome back Julie Davis to Liquidity Services as our Director of Corporate Communications.

I'll begin this session by reviewing Q4 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 Rallo for more details on the quarter, and on our outlook for the year.

Q4 was a very productive quarter for Liquidity Services as we exceeded our guidance range while continuing to make important investments for the future. Q4 GMV was up 32% year-over-year, to a record $122 million, driven by growth in the volume of capital assets sold across our commercial and government clients. Partially due our recent Network International acquisition, which has been performing well as we continue to integrate the business.

Adjusted EBITDA of $8.3 million was up 17% year-over-year, and adjusted EPS, which excludes non-cash compensation expenses, was $0.13.

We continued to demonstrate our financial strength by generating cash from operating activities of approximately $7.5 million during Q4. And we ended fiscal year 2010 with approximately $77 million in cash and zero long term debt. As we reflect on our accomplishments during fiscal year 2010, let me briefly revisit our strategy and where we stand in our Company's development.

Liquidity Services was founded with a vision to deliver efficiency and convenience somewhat to that of a NASDAQ exchange to buyers and sellers of surplus assets. To this end, Liquidity Services has developed online marketplaces and integrated services that provide transparency, professionalism and efficient matching of supply and demand to a segment of the economy we call the Reverse supply chain, which has historically suffered from limited transparency, inefficiencies and lost value for all parties.

Today, Liquidity Services connects buyers and sellers of surplus assets in ways that are virtually impossible in the physical world. For example, during this past quarter, we sold forklifts located in New Jersey to a buyer in Utah, who competed with bidders throughout North America. We sold industrial drill bits located in Australia to a buyer in Venezuela, who competed with bidders in Australia, the UK, Singapore and throughout the United States. And we sold containers of toys, apparel and sporting goods located in Indianapolis to buyers in Toronto, Panama, India, Vietnam, Nigeria and Jordan.

Indeed, our eCommerce platform connects buyers and sellers globally in an inherently more efficient way than traditional methods to create substantially more value for all parties.

Today, Liquidity Services is the most trusted solution for commercial and government sellers to manage and sell surplus goods, and we now serve over 4,000 commercial and government clients that sell assets online to our over 1.4 million registered buyers across the globe.

During fiscal year 2010, our team made significant progress in advancing LSI's mission. We recorded $430 million of GMV, up 21% year-over-year. In fact, during the past three years we have completed approximately $1.4 million online transactions, generating over $1.1 billion in GMV for our clients. And since 2003 we have grown our GMV at a compound annual growth rate of 26%. In recognition of these consistent results and growth, Liquidity Services was recently added to the US Standard and Poor's SmallCap 600 index, and was again named one of the top performing SmallCap companies in America by Forbes magazine.

During fiscal year 2010 we continued to advance our strategy to meet our long term goal of building a $1 billion annual GMV business. We grew our base of top retailer and municipal clients, as organizations continued to focus on reducing costs, improving transparency and working capital flows by leveraging our eCommerce platform and services. We now serve over 50 Fortune 500 corporations and have a significant base of knowledge and expertise to build from.

We expanded our capital assets business both organically and through the acquisition of Network International and a talented management team led by Boyd Heath. Overall, the sale of capital assets represents approximately 50% of our GMV, and is a growing area of focus and opportunity for Liquidity Services.

During the past year, we also made important infrastructure investments to support cross Company scalability, such as enhancing our website architecture on our Liquidation.com and UK-Liquidation.com marketplaces, to create a more flexible and intuitive site design that has improved the user experience.

During fiscal year 2010 we also enhanced our leadership team with the addition of Ben Hanna to the newly created position of VP Marketing Strategy to leverage cross Company synergies with respect to our buyer base, branding and marketing communications. We also added two new distinguished and experienced members to our Board of Directors. David Perdue, former CEO of Dollar General and Executive Vice President of Reebok International, and George Ellis, current CFO of Global 360, Inc., and former CFO and founder of Sterling Commerce, Inc.

We believe these actions, and our continued focus on driving operational efficiencies, investing in innovation and enhancing value for our clients and buying customers, positions us well for fiscal year 2011 and continued long term profitable growth and market leadership.

During fiscal year 2011, we see numerous opportunities to further grow and improve our business, and have identified the following key initiatives to advance our strategy. First, drive client development within the retail supply chain and public sector markets. We intend to grow and diversify our retail supply chain client base in fiscal year 2011.

We have developed a full range of both sell-in-place and full service solutions to meet the needs of large and mid-size retailers, and the vendors who supply them, regarding the management and sale of their store returns and seasonal overstock goods. Although we have observed widespread discounting among top retailers, we believe there's a strong effort to revert to full margin sales activities coming out of this holiday season. We intend to leverage our online marketplaces and experience serving the world's largest retailers and manufacturers to help retail supply chain clients manage their post-holiday return volumes and ongoing reverse supply chain activities in the most efficient and transparent manner throughout fiscal year 2011.

Additionally, we plan to further expand our GovDeals business to capture more share in the $2 billion municipal government surplus market. Our brand awareness continues to grow and municipal government agencies are increasingly using our marketplace to improve transparency around the sales process and recover more value from surplus assets to address budgetary deficits. We believe our GovDeal solution is ideally suited to address the pressing needs of state and local governments in the coming year.

Second, develop and grow multiple buyer channels for client assets to deliver the maximum recovery for clients. To this end, we will continue to enhance our B2B marketplace, Liquidation.com, with a direct sales tab for export buyers who seek to buy goods in larger quantities than are offered through our standard auction platform. We also intend to cross promote offered goods using our UK-Liquidation.com marketplace to tap European-based exporters of US goods, and vice versa. This capability is important to many retailers and manufacturers who desire a fully compliant export process for store returns to protect their brands and distribution channels.

Additionally, we have recently developed the capability to sell products on our clients' behalf directly to end users and/or consumers using a range of existing marketplaces.

Third, increase penetration of the corporate capital assets marketplace, which we estimate to be a $20 billion GMV market opportunity. This initiative builds on our leadership position within the retail and government sectors, and our recent acquisition of Network International. It also leverages our large global buyer base and product knowledge within the capital asset sector.

We believe the Internet presents a more efficient and effective model for commercial sellers of capital assets than physical on-site auctions. Including, a global buyer region competition, faster sales cycle times, reduced transportation logistics and make ready costs. Liquidity Services brings important core competencies to create value for sellers and buyers in the capital assets market. As we have merchandised and sold over $500 million in GMV of heavy equipment, rolling stock, machine tools and scrap metal during the past five years. Additionally, Liquidity Services possesses the expertise to establish and grow a global online capital assets marketplace for commercial clients.

Finally, we plan to make further investments in our technology infrastructure in fiscal year 2011 to further integrate our business and online marketplaces to improve our performance, reliability and scalability. Such investments will ultimately support a more scalable institutionalized and consistent approach to serving our buyers and clients as we expand geographically, cross sell our services in different markets and integrate acquired companies.

In summary, we have a strong, diversified overall business that we expect will generate top line growth, positive cash flows and excellent returns on invested capital in fiscal year 2011.

We have leading eCommerce marketplaces addressing multiple large market opportunities, and we have the financial strength and operating discipline to invest in future growth to create long term value for our stockholders. While we are very proud of our accomplishments in fiscal year 2010, the future is even brighter for LSI. Our entire team of over 700 associates looks forward to working together 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 at the beginning of the year, 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 fiscal year results and expected 2011 growth reflects both market share gains and our continued focus on enhancing service 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 stock holders. Fiscal year 2010 adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, has improved 59.1%, to $37.5 million, from $23.6 million in fiscal year 2009.

And operating cash flow has improved 269.8%, to $31.9 million, from $8.6 million over the same period.

Next, I'll comment on our Q4 financial results, which came in above our guidance range for Gross Merchandise Volume, or GMV, adjusted EBITDA and adjusted earnings per share.

Total GMV increased to a record $122 million, up 32.5% year-over-year. GMV in our DoD scrap business increased to $20.6 million, up 23.6% year-over-year, as a result of increasing commodity prices and a mix shift to higher value metals.

GMV in our DoD surplus business increased to $22 million, up 10.3% year-over-year, as a result of increasing property flow from the DoD, and a higher mix of higher value capital assets, such as rolling stock.

GMV in our public sector, or GovDeals business, increased to $22.6 million, up 10.5% year-over-year as we continue to add new clients, thus further penetrating the $2 billion state and local government market.

GMV in our US commercial business increased to $54.1 million, up 76.8% year-over-year, principally as a result of the Network International acquisition completed on June 15, 2010.

Total revenue increased to $72.9 million, up 15.9% year-over-year, primarily due to -- one, the increase in our scrap and surplus businesses previously discussed, and two, a higher mix of clients utilizing the purchase model on our US commercial business.

Technology and operations expenses increased 11.8%, to $12.8 million year-over-year, primarily due to increases in staff wages, including stock-based compensation. As a percentage of revenue, these expenses decreased to 17.6% from 18.2% as we continue to get leverage on our fixed infrastructure, particularly our distribution center network.

Sales and marketing expenses increased 28.7%, to $6.4 million year-over-year, primarily due to increases in staff wages, including stock based compensation associated with the hiring of 24 additional personnel to support the growth discussed above. As a percentage of revenue these expenses increased to 8.7% from 7.9%

General administrative expenses increased 14.9%, to $6.3 million year-over-year, primarily due to one, $300,000 from increases in staff wages including stock-based compensation; two, $300,000 from increases in general corporate expense; and three, $200,000 associated with business development activities. As a percentage of revenue, these expenses were consistent at 8.7%.

The Company continues to demonstrate strong cash flow generation and growth. Although we experienced a greater mix of purchase business year-over-year, we continue to achieve strong inventory turnover within our commercial business and our overall working capital continues to be a source of cash. During Q4 LSI generated $7.5 million of operating cash flow, up 64.3% year-over-year.

Adjusted EBITDA grew 17.3% year-over-year, to $8.3 million. Our investments in improving service levels and operating efficiencies have enabled us to expand our margins during the fiscal year. Adjusted EBITDA margin was 11.4% in the quarter based on revenues, and 6.8% based on GMV. Adjusted net income grew 278.9% year-over-year, to $3.4 million. And adjusted diluted earnings per share, or adjusted diluted EPS, was $0.13 for the quarter, based on approximately 27.4 million diluted weighted shares outstanding.

I'll now discuss the fiscal year 2010 results and will not provide detailed explanations for changes from fiscal year 2009, when those explanations are similar to the ones previously discussed in my year-over-year comparison for the fourth quarter. GMV increased 20.8%, to a record $430.1 million for the year ended September 30, 2010. Revenue increased 21.4%, to a record $286.8 million for the year ended September 30, 2010.

Technology and operations expenses increased 5.5%, to $49 million, for the year ended September 30, 2010. As a percentage of revenue, these expenses decreased to 17.1% from 19.7%. Sales and marketing expenses increased 16.4%, to $21.3 million for the year ended September 30, 2010. As a percentage of revenue, these expenses decreased to 7.4% from 7.7%, primarily due to the increases in revenue while leveraging our fixed costs such as marketing staff.

General administrative expenses increased 10.4%, to $24.9 million, for the year ended September 30, 2010. As a percentage of revenue, these expenses decreased to 8.2% from 9.5%, primarily due to the increases in revenue while leveraging our fixed costs, such as corporate staff. Adjusted net income grew 92.2% year-over-year, to $16.2 million, and adjusted diluted EPS was $0.59 for the year, based on approximately 27.4 million diluted weighted average shares outstanding.

Our tax rate for the quarter and the year was approximately 50%. However, we estimate that our future effective income tax rate will be approximately 46%, which is comprised of one, approximately 35% for federal taxes; two, approximately 8% for state taxes, which combined approximates our cash tax rate of 43%,; and three, approximately 3% for book and tax differences, including stock based compensation expenses primarily related to employee stock options which are currently expensed in our financial statements but are not deductible for tax purposes until they are exercised.

We continue to have a strong balance sheet. At September 30, 2010, we had a record cash balance of $76.8 million, or approximately $2.81 per share in cash. Current assets of $107.7 million, and total assets of $163.9 million. The Company continues to be debt free, with $60.1 million in working capital.

Capital expenditures during the quarter were $600,000, and $3.7 million for the fiscal year. We expect capital expenditures to be $4 million to $4.5 million for the fiscal year ended September 30, 2011.

Management is providing the following guidance for the next quarter and fiscal year 2011. We have assumed that we will once again receive the annual incentive payment under the DoD scrap contract in the third quarter of fiscal year 2011. We expect GMV for fiscal year 2011 to range from $465 million to $505 million. We expect GMV for the fiscal first quarter of 2011 to range from $100 million to $110 million.

We expect adjusted EBITDA for fiscal year 2011 to range from $40 million to $44 million. We expect adjusted EBITDA for the fiscal first quarter of 2011 to range from $6 million to $8 million. We estimate adjusted earnings per diluted share for fiscal year 2011 to range from $0.66 to $0.74. For the fiscal first quarter of 2011 we estimate adjusted earnings per diluted share to range from $0.08 to $0.12. This guidance reflects the recent impact of our stock repurchase program, under which we repurchased 110,800 shares for approximately $1.6 million during the prior quarter. However, it does not assume that we will continue to repurchase shares with the approximately $11.7 million yet to be expended under the program.

Our guidance for EBITDA and diluted EPS for the effects of stock-based compensation, which we estimate to be approximately $2 million to $2.2 million per quarter for fiscal year 2011. These stock based compensation costs are consistent with fiscal year 2010.

Bill and I will now answer any questions.

Ladies and gentlemen, if you have a question, please press star one on your phone now.

(Operator Instructions)

Your first question is from line of Jason Helfstein with Oppenheimer and Company. Please proceed.

Thanks. Clearly we're seeing a turn in the GMV per transaction. What seems to be trending along with the economic cycle.

So maybe if you can comment on what type of GMV per transaction you're seeing heading into next year. Obviously, we saw 34% is probably not a sustainable growth rate, but maybe talk about what was behind that.

And then, bigger picture. As we're seeing a shift toward eCommerce, you do see more returns with that. Talk about how you guys expect to benefit from that. Thanks.

Thank you for the question.

Let me give you a couple observations. I think there's cross current as it relates to retail supply chain and reverse supply chain volumes. I think you're absolutely correct. The secular shift from traditional brick and mortar to online means that there's some imperative for these online outlets to take returns, to provide consumers trust with the proliferation of consumer electronics and other technology items. There's more confusion, and even more product obsolescence, even in a six, nine, twelve week window you have some refresh or reset of technology.

So, return rates for online are double or more the rates of offline, 10%, 15% or even 20% return rates. So, smart online retailers are increasingly looking for supply chain solutions to manage that influx of returns. We're well position to be that best in class solution provider. And over time that secular trend benefits LSI. In terms of where we are for the holiday season, most retailers move forward their promotional pricing to drive volume. There was a nervousness among retailers entering this holiday season, that they did need to do something special to drive consumer behavior. And that has resulted in more aberrational instore discounting than we've seen in other points during the year.

That reduces the price point for the same item year-over-year that we saw in our marketplace, which would have a tendency to depress GMV.

I would expect that to be unsustainable. As we move out of the holiday season, we would revert to more full margin pricing among these retailers. As it relates to the year-over-year GMV transaction trend, I'll pass it on to Jim.

Jason, what has happened, in particularly in the fourth quarter, we had our first full quarter of Network International, which the nature of the assets that we're selling in that sector, the energy sector in particular, and really it adds to our capital assets business which today is over 50% of our business. When I refer to capital assets I'm talking about rolling stock that we sell for the federal government, vehicles, transportation equipment, as well as specialty equipment we're selling for states and local governments on our public sectors site GovDeals. And so the average transaction size has increased year-over-year from around $700 to over $1000, as we indicated in the press release.

We would not expect to see a continuation of that trend. We wouldn't expect to see a significant degradation, either. As we continue to grow that piece of our business, those assets tend to be larger type of auction a lots, and so that's what's driving it.

Just to follow up. Back to Bill's comments. To the extent that anybody's disappointed with your GMV guidance for the first quarter, you think that's a function of exceptionally deep discounting we're seeing retail environment and obviously I don't think anyone expects that to be sustainable.

I think that's correct. I think among the head winds coming out of the December period, that would be one. Having said that, the other side of the holiday is typically an opportunity for us to be out selling our services, streamlining the process for retailers who are very focused on reducing costs, being more efficient on the back side of the supply chain.

Thank you.

Your next question is from the line of Shawn Milne with Janice (sic) Capital Markets.

I want to follow up on the questions, the comments around the holiday.

Bill, this is certainly not Q4 2008. And, in fact, all the retail numbers coming out last couple days are obviously very good. Frankly, the promotional environment -- I think there was clearly early promotions. But, not hearing across the board that it's significantly more promotional than last year. At the same time you have new clients in your retail base which you should be growing those partnerships as we move forward. I haven't seen specific November data for GMV in the commercial. So, I'm just wondering to what extent are you seeing these head winds? Are you seeing GMV down in November? Or, are you just being conservative in your guidance, which you tend to be? I'm trying to pull those two sort of items apart.

Yes, so. In terms of growing the client base, growing the pipeline of business, that has resulted in us continuing to grow overall GMV and the trends in the quarter would support that.

I did a panel with a bunch of folks at TIA Consultant talking about the retail business. You look at the same products and the price points year-over-year -- 32-inch flat panel TV, 48-inch flat panel TV. Prices are down. That's not so much a volume issue, it's a price issue. So, that's really the point I was making.

Okay, so just to dive into that point a little bit. So, specifically do you believe you might be a little bit overweighted in perhaps consumer electronics, where you are seeing significant price reductions that are more rapid price productions than necessarily perhaps like apparel promotion?

We've always had exposure in our consumer electronic business. If you're going to work with broadline retailers, we will be providing a channel for liquidation on that side.

Just a point to be making around this time of year, those are very hot items and those are the items that typically will be locked leaders for retailers, which effect pricing. Having said that, the overall volume of the business is continuing to grow because we are penetrating existing clients. We are adding new clients in the retail supply chain. We're adding vendors who supply retailers and the supply chain.

So, the business is a growth business. It's just that we would point out that Cyber Monday is now turned into Cyber Month. It's a permanent change in the way people promote it this year versus prior years.

Can you get any quantification behind those numbers?

Quantification of the industry?

In terms of what you're seeing in your commercial volume quarter-to-date. Or, what you've seen specifically in the holiday in terms of volume versus price.

The point we want to make sure we're expressing here, is -- it's less about overall volume and more about per unit volume.

So, in the last six months, especially, we've seen a trend where the good are selling for less than they have in the past. Which is effecting margins some in our commercial business. Overall, the information is up on the site, so you can see the results for October and November on the commercial site.

The GMV is fairly healthy. Although it has been affected some, obviously the per unit pricing is down, and I would tell you that it's down anywhere from 8% to 12% in general. But the issue has been a little more on the margin side of that business. There's a lag in how it effects our profitability.

I think the point we're trying to make are more on a per unit basis, not necessarily as we roll out new clients, as you mentioned earlier in your comments.

But then, it's listed in your guidance you have earnings picking up the remainder the year. What give you the confidence in that? Could -- you just guided earnings down 40% year-over-year in the first quarter?

Well, again, we had EBITDA of approximately I believe it was $8.2 million -- sorry, $8.4 million in the prior year quarter. Again, we've got a range of $6 million to $8 million in there. It depends on how you're looking at your point in the range. As we indicated, that has to do some with the -- it's two points really -- one is the margins we discussed, and; the second is our technology expenses, which Bill mentioned in his remarks.

Let me be specific about that. We are planning to spend about $2 million to $2.5 million this year on additional IT enhancements over and above what we spent last year. A lot of this is going into infrastructure around updating our data centers and software around those data centers to handle the scale that the company is experiencing and to really set us up to get to that $1 billion goal that we have. So, a lot of those expenses are front-loaded in the year. That also is impacting some of the margin.

Okay. Thank you.

Once again, ladies and gentlemen, if anyone has a question, please press star one on your phone now.

And your next question is from the line of Colin Sebastian with Lazard Capital Market. Please proceed.

This is Greg (inaudible) for Colin Sebastian.

I was hoping to see if we can get a little bit more of a break down in terms of the commercial GMV that's incorporated in the guidance? For fiscal '11?

Sure. We expect commercial GMV to grow at least 20% next year.

Right. Would it be possible to get more granularity of the breakouts of different components of that GMV?

We have historically not broken that out in our guidance. Obviously, we do break that out on a historical basis as we report the quarter in the years. But we don't break out our guidance down to each segment of the business.

Right. But are you expecting any material changes in the mix of the commercial GMV?

Well, the commercial GMV as we discussed earlier on the call, has been enhanced by the addition of Network International. There's been a higher level of capital assets in that business. If that's what you're referring to. So it's a vertical thrust that we've been in for a while. And let me explain by that. We have worked with large retailers over the years and selling capital assets for them. We expanded into energy sector as well. We've been working with companies such as Chevron and other big energy producers. And therefore we're selling a lot more capital assets. That's part of our commercial business which is driving up the average auction price, as we discussed earlier.

So I would say that the mix would probably be similar to what it was in the fourth quarter of last year.

Okay. And then coming back to the expense issue and the EPS guidance for Q1. You were mentioning that (inaudible) and IT infrastructure. And you said those expenses will be front loaded, but wouldn't they for the most part be depreciated over a few years?

Those are not hardware expenses. Those are software and programming expenses. Which, under our accounting methodology, we expense most of those. The actual hardware upgrades that we do buy, we will capitalize. But that was in the not number that I quoted to you earlier.

Right. And, to the point that was raised earlier about the dramatic growth in online customer electronic sales -- Are you banking anything into the guidance in terms of increased returns?

We have a consistent view with respect to the share of products coming back among our mature clients. Return rates have picked up marginally. The National Retail Federation numbers support that. But nothing that would be a huge catalyst or that would be factored into our guidance.

All right. Great thanks.

And gentleman there are no other questions at this time. So I'd like to turn the call back over to Mr. Bill Angrick.

Thanks for your participation on the call. As always, we will be available for further questions after this conference call is over.

Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Everyone have a great day.