LQDT
#Thank you, <UNK>.
Good morning, and welcome to our Q1 earnings call.
I'll review our Q1 performance and provide an update on key strategic initiatives.
Next, Mike <UNK> will provide more details on the quarter.
Finally, <UNK> <UNK> will provide our outlook for the current quarter.
Though not satisfied, we are encouraged with our Q1 results as our GovDeals segment grew its GMV 27% year-over-year through expansion with existing and new accounts in the U.S. and Canada.
And our Retail Supply Chain Group segment grew its GMV 17% year-over-year, driven by growth with both large and midsize retailers and manufacturers utilizing our sales channels and returns management services.
Our Capital Assets Group segment faced a tough year-over-year comparison because several large commercial sales occurred in the prior year period.
However, GMV related to our commercial CAG business, excluding our DoD contracts, grew sequentially by 51%, driven by growth in our LOT-enabled energy marketplace with multi-energy ---+ multinational energy clients and as many of our industrial manufacturer clients used our platform to sell high-value assets.
During the quarter, we added approximately 300 new commercial and government sellers and approximately 38,000 new registered buyers to our marketplaces.
Our Q1 results also demonstrate the positive impact of our cost-reduction efforts, driven by a more streamlined and efficient organizational structure.
We continue to reduce our expenses, which offset the impact of the wind-down of the DoD Surplus contract during 2018, while integrating our marketplaces and increasing their productivity.
Next, I'll take a look at highlights of our business segments.
Our GovDeals marketplace growth accelerated in Q1, driven by the addition of hundreds of new clients in the U.S. and Canada, including the Commonwealth of Kentucky and the Florida Department of Transportation.
During Q1, GovDeals completed over 51,000 auctions, including vehicles, heavy equipment, helicopters, and even a snow-melting machine was sold for 6 figures.
Our Retail Supply Chain Group segment continued to grow the top line organically, with GMV up 17% year-over-year.
Of note, self-service GMV within our retail segment grew 27% year-over-year as we have increased adoption of our self-service model with many clients to give them more flexibility and control of their sales activity.
Our RSCG team continues to experience encouraging customer interest in our Returns Management service offerings from both midsize and Fortune 1000 retailers and manufacturers, and we expect to expand in this area.
GMV in our Capital Assets Group segment experienced strong sequential growth in the quarter, driven by more activity with commercial sellers in our energy and industrial verticals, offset by our DoD Surplus and Scrap Contracts, which continue to be hampered by lower volumes and declining value of assets received compared to historical trends.
Our Capital Assets Group pipeline with commercial organizations is the strongest it has been in several years, and we expect to see continued improvement as we move through Q2.
In April, Liquidity Services will host our Energy Insights conference, which will bring together clients across the globe and the energy supply chain in Houston to discuss strategies and tools to capitalize on the energy sector market recovery and create value for their organizations.
Our strategy in fiscal '18 and beyond remains focused on the long-term growth of our commercial and municipal government marketplaces on a global scale while capturing operating efficiencies as we complete the integration of our marketplace platform and business functions under our LiquidityOne transformation program.
In fact, we began to see the benefits of driving improved productivity and lower cost during Q1 due to the investments we've made in our LiquidityOne program.
Also, we expanded the beta test of our new commercial self-service marketplace, AuctionDeals.com, during Q1 and have sold nearly 400 items on this new marketplace, ranging from vehicles, heavy equipment, consumer goods and technology assets.
As we've previously announced in December, we've appointed Roger Gravley as Chief Information Officer and expanded his responsibilities to include oversight of our technology platforms, IT operations and services, including the implementation of our LiquidityOne e-commerce platform, ERP system upgrade and new Returns Management and self-service offerings.
Given the planned wind-down of the DoD Surplus contract, we will focus on accelerating the decommissioning of legacy tools dedicated to running this part of our business.
We expect to complete the launch of our remaining marketplaces on our new e-commerce platform during 2018.
Finally, we anticipate the launch of a new consolidated marketplace on our LiquidityOne e-commerce platform by the end of 2018, which will serve as a single marketplace to search, find and buy any asset from any seller across our network of marketplaces.
We expect a single, unified marketplace to drive increased traffic from our buyer base through more efficient marketing strategies and provide our buyers with a more efficient method of sourcing our global supply of available assets from sellers across the globe.
We exited the quarter in a strong financial position to pursue our growth initiatives with $96.7 million in cash and 0 debt.
In closing, continued investments in our people, processes and platform will enhance the value we bring to sellers and buyers and drive our transformation.
As we begin to harvest the investments we are making over the next few years, we are excited about the tremendous potential to grow our business.
Liquidity Services is committed to driving innovation and significant value creation for our customers and shareholders as we execute our long-term growth strategy.
Now let me turn it over to Mike for more details on Q1 results.
Thank you, Mike.
Good morning.
As our first quarter results reflect, we are making progress on our 2018 goals to grow our commercial and municipal government marketplaces and are on track with our e-commerce platform and ERP solution.
At the same time, we are seeing the benefits of our realignment in 2017 of our TruckCenter and our IronDirect businesses and also the reorganization efforts this last fourth quarter and first quarter of fiscal year 2018 to reduce our overall cost structure, create efficiencies across the business and streamline our technology, corporate, sales and marketing functions.
Regarding our fiscal year 2018 outlook, as impacted by the DoD Surplus Contract, we have defined and are executing on the wind-down plan and expect to sell through all remaining inventory by April and complete most of the wind-down of contract-related expenses by May, including a reduction in headcount to warehouse locations and multiple field sites.
We do not anticipate profits from the Surplus Contract starting with this upcoming second fiscal quarter of 2018.
However, for fiscal year 2018, we expect to generate cost benefits of $12 million to $14 million as a result of our reorganization efforts.
These benefits, combined with the benefits from the realignment of our TruckCenter and IronDirect businesses in fiscal year 2017, will offset the impact of the Surplus Contract compared to fiscal year 2017.
Turning to our fiscal year 2018 LiquidityOne initiatives.
We expect our overall time line to remain on track, and our associated spending is expected to be in the $1.5 million to $2.5 million range per quarter for the remainder of 2018.
Our second quarter fiscal year 2018 results year-over-year comparison reflect: one, favorable results in our RSCG segment as we continue to add new seller relationships and benefit from higher volumes received from the strong holiday season for retailers; two, in our commercial business within the CAG segment, while expected to be in line with second quarter fiscal year 2017 top line results, including some project-based sales, we expect a bottom line improvement as a result of the recent cost reductions; and three, we will continue to see strong growth in our GovDeals segment.
Offsetting these year-over-year overall pipeline improvements is the GMV reductions from the Surplus Contract as we are selling through our remaining inventory, which is low-margin, low-value property that is expected to yield lower GMV and much lower returns on a comparative basis for that contract.
Also, our DoD Scrap Contract is expected to have comparatively lower performance related to reduced property flows and lower value mix of assets.
Management's guidance for the next fiscal quarter is as follows.
We expect GMV for Q2 of 2018 to range from $150 million to $170 million.
A GAAP net loss is expected for Q1 2018 in the range of negative $8.4 million to negative $6.1 million, with a corresponding GAAP loss per share for Q2 of 2018 ranging from a negative $0.26 to a negative $0.19 per share.
We estimate non-GAAP adjusted EBITDA for Q2 of 2018 to range from a negative $5 million to a negative $3 million.
A non-GAAP adjusted loss per share is estimated for Q2 of 2018 in the range of negative $0.23 to negative $0.16.
This guidance assumes that we have diluted weighted average shares outstanding for the quarter of approximately 32 million and an effective tax rate in the single digits.
We will now take your questions.
Sure.
So we are very buoyant in the addition of new client relationships in both the retail supply chain, I'd say, industrial supply chain and in municipal government market.
Well over 300 new accounts signed during the December quarter.
Let me go through each area, <UNK>.
The municipal government market, which is a market that we've been in, really, since the inception of the company, is one where peers heavily influenced the adoption of best practices with 11,000-plus clients at the state, county, local level who largely attend similar conferences and are asking their peers how they're solving issues related to property management, asset disposition and other matters.
We're really well positioned there as the leading player in that channel.
And we continue to add clients, both from a geographic perspective, a type of client ---+ from transportation, schools and universities, large administrative services throughout government.
We've expanded geographically, West and Northwest, in the United States.
We've expanded north of the border to Canada.
So I think this is just broad-based secular growth driven by the efficiency of our model, the adoption of digital approaches to solving the needs of government and the efficacy of driving higher recovery rates on the platform.
As our supply grows, our buyer base grows and so forth.
On the industrial supply side, the industrial supply chain is very disruptive.
People are changing their approach to holding assets.
Property, plant and equipment and entire factories are being relocated, in some cases, downsized, and we're benefiting from that trend.
As I noted, we have the strongest pipeline in the Capital Assets Group commercial business that we've had that I can recall.
And so we're working with Fortune 100 companies, Fortune 1000 companies and even small, midsize businesses that are trying to leverage the liquidity created on our marketplace platform.
The industries covered in this part of our business include the energy supply chain, which has benefited over the last 90 days from some recovery in energy prices.
I think buyers are joining in the improved sentiment that businesses have to spend money and invest partly due to fiscal reform, tax reform and availability of ---+ energy prices justifying drilling and activity.
So energy is strong.
We also serve the biopharma/health care market.
There's lots of innovation happening there, which necessitates rebalancing asset portfolios.
We work in the electronics manufacturing semiconductor supply chain, and we're involved with many large global projects there.
The reach of our global marketplace is very important because often the buyers are not in the same country or even continent as the seller, so our cross-border capabilities there is very important ---+ are very important.
We work in the consumer packaged goods market, very dynamic market, lots of growth and repositioning of plant and equipment around where consumer demand is.
So those are some examples of what broad-based growth we have in industrial.
On the retail side, undoubtedly, this is peak return season.
And seasonally, it's the high period for our retail supply chain marketplace, and our Liquidation.com channel, for example, is benefiting from that.
We've seen adoption of our services not only with, let's say, top 50 retailers and manufacturers but, increasingly, in the middle market.
And we're working with many companies that are, let's say, very niche-focused e-commerce players who don't have the benefit of a large physical brick-and-mortar store network or distribution center hub network.
So we're providing that network with respect to returns management.
We're providing our software, our services and our distribution facilities to create value for these online ---+ I would say, native online players who never had brick-and-mortar operations.
And we expect that macro trend to be beneficial to our business as the secular growth of online shopping continues to grow.
And the metrics around the return season, depending upon who you talk to, National Retail Federation, I believe, quoted over $90 billion of returned goods just from the holidays, something like $300 billion of returns annually expected in 2018.
So this is something that is certainly a driver for what we do, which is remove the friction from the retailers and manufacturers, recovering value, reducing the number of touches(inaudible) on these goods by leveraging our distribution centers and our software.
And I think what's interesting for us is that our Returns Management platform is now being demoed to be used with clients in their own facilities as a service, software-as-a-service.
So we're excited about that.
I think that covers all of it.
On the headcount, I'd say we're still aggressively hiring in certain categories, particularly in the software development, engineering area.
I think we've taken headcount down in the warehouse sector, specifically with the DoD wind-down that we have.
Where are we trending versus overall plan.
I think we're, perhaps, slightly below the annual target as we take our time on the engineering and software development hires and make sure we have the right cultural fit.
I think headcount, overall, <UNK>, is down year-over-year.
And as far as the growth of our business relative to breakeven, obviously, you have costs that are constant with a business of our size publicly traded.
So at the margin, if we were to sunset a long-standing program like we are DoD, we're not going to make dramatic changes to some of those areas of our business.
However, as we grow, we're growing a lot of service revenue streams, which are attractive, high-margin service relationships that have multiyear attributes to them, and that provides very attractive aspect of our growth.
So we will continue to manage product volume and move sales to the marketplace, but we're bundling a lot of our, let's say, core liquidation activities with value-added services related to returns management, value-added handling of the merchandise.
And eventually, the data that we create for our clients can ---+ will be valued in how they manage their own supply chain.
<UNK>, this is <UNK>.
Our headcount is down over 100 on a quarter over ---+ over the same quarter last year.
Correct.
I think sales, marketing, engineering are the areas for growth.
We are getting back-office efficiencies as we consolidate systems with regard to operations, finance and other, say, back-office functions.
And of course, the Surplus Contract headcount will be reducing between now and the end of the spring, as I noted, because we're still executing on that.
Yes.
Those rates will move a little bit as we have seasonality in the business.
For example, in the March quarter, a seasonally high quarter, so we'll get some leverage on the sales function.
But I think generally, the band that you see between, let's say, Q1 and Q2, would be representative of the full year.
Yes.
And we've gone ---+ first of all, as revenue grows, the numbers are going to change quite a bit just as they fluctuate as a percent of revenue.
We've also done some things to create more variable expense that will help us eliminate that, having the fixed cost base.
So as we go forward, we're also looking more and more where we can create areas where we might view them as ---+ especially in our operations, where there may be more fixed costs that we can turn down into variable.
So just from a cost perspective, the costs that we've taken out in our restructuring are costs that are permanently out.
Sure.
Consignment is a trend that has continued to increase with our clients.
So we're over 75% consignment on a consolidated basis today.
And as we sunset the DoD Surplus Contract, we would expect that number to continue to grow as a proportion to the total.
And let me just add.
Let me just add.
The Surplus Contract, a contract that we ran successfully for many, many years, is a contract that we would have certainly liked to retain, but the contract terms were so onerous.
And it was a 100% purchase model relationship, so you had to buy the inventory, being contractually obligated to take any and all property flow, whether it was high value, low value, single lump sum price.
So we know, in many, many of the commodity categories, you're underwater as soon as the property is referred to you, much less when you have to then apply labor, marketing and sales.
And you are obligated to stay in that contract for the duration.
There's no termination for convenience by the contractor.
So you could be losing millions of dollars on that contract, and you have to stay in it with the federal government.
So while we would have liked to secure it, we felt bidding any higher on that contract would have been damaging to shareholders.
So we've turned our attention and our focus on our balance sheet, on growing much more attractive, high-potential areas that use the consignment method primarily to grow.
Sure.
Well, let's just focus on surplus.
Surplus is a smaller, smaller percentage.
So the commercial business would represent the vast majority of the CAG segment as you move into Q2, <UNK>.
So your question ---+ yes.
What I'm saying is, in Q2, DoD Surplus is winding down, right, becoming a smaller part of that CAG segment.
And once we ---+ both in Q2 and beyond, the vast majority of that business is commercial.
