Liquidity Services, Inc. (LQDT) Earnings

Management highlights

• Against backdrop of global tariffs, weather disruptions, geopolitical tensions, liquidity services grew market share and created value. Second quarter results fueled by broad industry coverage, robust buyer liquidity, improved operating leverage, driving 18% y-o-y increase in consolidated direct profit and 37% y-o-y increase in consolidated adjusted EBITDA. • Asset-like business model generated strong operating cash flow in excess of adjusted EBITDA, ended quarter with $204M in cash and zero financial debt. • Allocate capital to high-quality internal growth initiatives, complementary acquisitions, targeted share repurchases. • Diversified marketplace portfolio showed strength, RSCG leveraged data flows etc. to improve recovery and operating leverage. Retail segment GMV and direct profit up, D2C marketplace retail rush grew. GovDeals impacted by winter weather but direct profit grew, set new records. CAG segment grew GMV and direct profit, buyer base grew. Machinio had strong revenue growth and expanded into marine industry. • Used technology, software, data analytics to optimize recovery and operations, enhanced inventory scanning etc., leveraged AI tools. Marketplace scaled in size and engagement, served 6.3M registered buyers, 983,000 auction participants, 280,000 completed transactions. • Well-differentiated marketplace in $100+ billion circular economy, scaled technology-driven platform, will continue to create value by growing supply and demand in various areas.

Guidance

• Fiscal third quarter guidance: Anticipates year-over-year growth to continue. Execution on strong pipeline at CAG including in energy, continued high volume in retail segment despite seasonally high second quarter with some mix shift in product flows. GovDeals expected to continue growing GMB as enters typical seasonally high quarter and onboards new clients. Machinio and software solutions expected to continue growing. • Consolidated GMV for third quarter expected to range from $425M to $465M. Non-GAAP adjusted EBITDA expected to range from $17M to $20M. GAAP net income expected in range of $7M to $10M with GAAP diluted earnings per share ranging from $0.21 to $0.30 per share. Non-GAAP adjusted diluted earnings per share estimated in range of $0.30 to $0.39 per share. Both GAAP and non-GAAP earnings per share expected to reflect higher effective tax rate approaching mid-30s. Capital expenditure expected to remain consistent with recent levels of approximately $2M per quarter.

Segment performance

RSCG segment: Leverages data flows, analytics, and domain expertise to match product flows with buyer channels. Retail segment: GMV up 10% and direct profit up 29% y-o-y, D2C marketplace retail rush doubled GMV sequentially and set new records. Geographically growing retail buyer and seller base in Canada, Mexico, Brazil. GovDeals: GMB growth 5% due to winter weather, but direct profit grew 12%, set new records including new accounts signed up 30% y-o-y. CAG segment: GMV up 3% and direct profit up 11% y-o-y, buyer base grew 36% y-o-y, backlog at record. Machinio: 8% revenue growth, approaching $20M annual recurring revenue with over 90% direct profit margins, expanded into marine industry with more than doubled new marine customers and revenues sequentially in Q2.

Analyst Q&A

• Q: With what the weather impact that you experienced last quarter, does that snap back rather sharply here going into this quarter, Bill, in terms of whether delayed auctions or delayed product flows?

  A: Yes, Gary, those items, principally vehicles and heavy equipment that were not lotted in the March quarter didn't go anywhere. So they'll work their way through the system, and we'll get credit for that. And I would just point out what was sort of the headline of the quarter, which is our largest segment had this exogenous factor that limited production, i.e., the weather, and yet the breadth and diversity of your portfolio pushed through that to deliver stronger results.

• Q: And then just to follow up there, it seems like the last couple of quarters you've really increased your account base, and I think you're up 30% this quarter as well. What are you doing – differently, or have you just really added to the sales force and you're just attacking the market full bore?

  A: We have made investments in growing the size of the sales organization within GovDeals, and we're complementing that with very productive software and AI-related tools that make that sales organization more productive. targeting the right people at the right time with the right message. And that's improving conversion.

• Q: And then just lastly, backlog in CAG is at a record. Are you at liberty to discuss the size of that backlog and how long will it take for that backlog to start working its way through the system?

  A: Well, I think I can, in broad strokes, say that we have several hundred million of GMB in backlog, and we continue to win global mandates from Fortune 500, even Fortune 50 organizations that are looking at liquidity services on a multi-year basis to manage value and sell equipment. And we've noted that we've had strong results in energy, biopharma, healthcare, transportation, and heavy equipment. So I think with more objects in the pipeline with recurring sellers, we have a very strong position.

• Q: Nice results. Bill, I wondered if we could talk from a two-sided marketplace thought process. You've done an incredible job of getting more registered buyers, more auction participants. We always have the vagaries of the supply in any specific quarter. I'm curious if you're making investments, or if you can kind of define some of the investments you're making to build up the supply side separately, and then is that also an area你're contemplating more actively from an M&A perspective?

  A: Yes, we continue to have a multi-pronged approach to attracting supply in a couple different areas. One, we want to go deeper with existing accounts. We want to get every asset in the supply chain, every asset on the balance sheet, identified, valued, and on the platform. And that means making sure that our account management functions within government, within industrial, within retail, are just providing more data analytics to our clientele so they know that we can sell everything in their portfolio. And that includes new, used, salvaged, and scrapped. More assets coming out of existing accounts, too. We're obviously adding accounts, which we just discussed. I think we're becoming more productive in converting prospects to active sellers. Three, we're adding geographies to our platform. Within the U.S., we've gone to larger metro areas, larger counties, and a westward expansion. We've gone into Canada, and then through The work that we've done, particularly in our retail segment and our capital asset group segment, we're building more international clientele, clientele that can list and sell directly to the platform. We don't have to open up facilities. We just give them access to the buyer liquidity and these, you know, I think very effective tools to quickly describe the assets, enhance the descriptions, make sure that, you know, they do that in a self-managed way. And then our buying community loves accessing, you know, that new supply even outside the United States. And then finally, services. I think we're adding services that clients value and pay for both within sort of the transactional marketplaces, things like financing, variations of, you know, asset valuations, and then our auction software tools, which allows some of our clients to license our applications to create white-label marketplaces and then cross-list the assets within our aggregated marketplace. And Machinio, which is targeting the dealer community, has gone from what it was when we first started George in 2018 as sort of a lead generation platform that created a lot of value to allow buyers and sellers to get connected on a particular piece of equipment and close the deal. We've evolved to a comprehensive digital solutions platform, which is allowing the dealer to move everything into the cloud their inventory management, mobile responsive website, email management, customer management, digital marketing tools, and then financing tools and the ability for dealers to also monetize their services as well as their inventory by selling and pricing their services with various quote tools to buying customers. And that's where a lot of the margin for dealers are. And then we've taken that digital solution stack and have expanded into the marine vertical, you know, boats and water vessels, which is a huge dealer community that is showing a high propensity to buy the machinio services. So we're excited about expanding services broadly.

• Q: You talked about dynamically matching flows in the retail segment. I wondered if you could just give us a bit of a picture as to that matching process. And if you can also address the retail rush that, you know, the numbers are growing very quickly there. We've looked at你as a potential Shopify alternative to some extent. Can you just give us a broader update there?

  A: Sure. Well, there's just, think of a river of returns coming every day from the retail market. particularly online retail activities. And so the job is to quickly use decision support tools for each item by seller to determine what's it worth and who's the right buyer net of costs. So by being able to create a catalog by customer of their entire inventory supply chain, and then mapping that to historical sales, which we've been doing for over 20 years, you then create a decision on where to allocate that item. Should that item be sold in a pallet to truckload quantity based on its condition and item retail and resale value, or should it be spotlighted and sold in a single unit through a direct-to-consumer channel like Retail Rush. And we also do manage third-party consumer-facing marketplaces for our clients. And so that ability to make the right disposition decision based on data, and that data is updated daily, is what allows us to extract more and more value over time. And the Retail Rush example, which is still nascent, but we think it has a lot of significant value in the industry, is allowing us to route higher value in-demand product based on these decision support tools to a consumer buyer who would then have it visible in an online setting, bid for and buy the item, and then essentially self fulfill the item by visiting the location, going inside the Retail Rush pickup location, getting a scan barcode or QSR on where the item is on the aisle on the shelf and then picking it up and then putting it into their car and driving away. So it's an elegant way to reduce the fulfillment cost and get the right items to a consumer buyer who will pay more money for the item and so it helps build the flywheel and we think that RetailRest channel, which is powered by our own auction software and powered by our data analytics, can proliferate throughout North America in strategic locations and just give more value to the entire retail supply chain. And it's a very low cost way to bring value to all participants.