Julie Davis – Senior Director of Investor Relations Bill Angrick – Chairman and Chief Executive Officer Jorge Celaya – Chief Financial Officer.

Colin Sebastian - Robert W. Baird Gary Prestopino - Barrington Research.

Good day, and welcome to the Third Quarter 2018 Liquidity Services Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will how at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Julie Davis, Senior Director of Investor Relations. You may begin..

Thank you. Hello, and welcome to our third quarter fiscal year 2018 financial results conference call. Joining us today are Bill Angrick, our Chairman and Chief Executive Officer; and Jorge Celaya, our Chief Financial Officer.

We will be available for questions after our prepared remarks, The following discussion or responses to your questions reflect management's views as of today, August 2, 2018, 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 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 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 volume and should not be considered as substitute for or superior to GAAP results.

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

Thank you Julie, good morning and welcome to our Q3 earnings call, I'll review our Q3 performance and provide an update on key strategic initiatives, next Jorge Celaya will provide more details on Q3 and our outlook for the Q4 quarter. We are pleased with our Q3 performance as our core business strengthened and we continue to expand our market share.

In fact we grew overall GMV during Q3 notwithstanding the completion of our legacy via the surplus contracts. Moving forward we have a much more diversified sustainable business tied to attractive growth opportunities in the retail, industrial and government markets.

We continue to transform Liquidity Services by driving higher recovery through innovation that improves our customer experience, expansion of our services and expense leverage. For example GMV from our asset light self service solution represented more than 50% of our total GMVs during Q3.

We successfully executed on our growth strategy in Q3 as we generated double digit organic growth in June via the ongoing businesses. We generated positive operating cash flow and we made important ongoing investments in our people and platform to drive future growth.

During Q3 we added over 375 new seller accounts and 26,000 new registered buyers reflecting the value of our transformation in better solving the needs of our sellers and buyers across our business segments and verticals. We also achieved better than expected bottom line results.

These were more favorable mix of higher margin transactions including increased self service volume in our GovDeals and retail supply chain group segments. Lower than expected expenses related to our LiquidityOne initiative due to lower consulting fees and lower corporate spending.

This strength was partially offset by continued softness in our energy vertical during the quarter. Next let us take a look at highlights of our business segments. Our Retail Supply Chain Group segment grew GMV by 13% year over year driven by strong performance from existing clients as programs with manufacturers and retailers expanded.

Service fees related to our returns management platform more than doubled from the prior year period. We've expanded our new business development pipeline for our returns management service offerings which helps clients to track, manage and sell both online returns and store return goods.

We are encouraged by the feedback from the marketplace regarding our returns management solution. Our GovDeals segment grew GMV by 13% year-over-year in Q3 driven by the addition of hundreds of new clients in the U.S. and Canada such as the state of Arizona and focusing on Ontario.

During Q3 GovDeals completed over 61,000 auctions including vehicles, heavy equipment and in municipal school property for over $1 million. GMV in our Capital Assets Group segment excluding our daily contracts exceeded our forecasts driven by strong consignment activity across the Americas, Europe and Asia Pacific regions.

Asia in particular continues to be a bright spot as our global marketplace and buyer liquidity delivered outstanding results for our multinational industrial clients. Our energy vertical experienced softness during Q3, due to a slower-than-expected rebound among our oil and gas sector sellers, who continue to hold their assets.

Next, I'll provide you the state on our LiquidityOne initiative. Our LiquidityOne transformation initiative is focused on delivering an improved marketplace platform and related tools to enhance our customer experience, operations and ability to scale to a much larger business.

As planned, we successfully released an enhanced version of our GovDeals and auction deals self service marketplaces during the quarter that improves the back-office support we provide our customers both buyers and sellers and our internal operations teams.

In addition, we made substantial enhancements to our LiquidityOne returns management software platform to support the needs of retailers and manufacturers.

Our industry-leading returns management solution has been architected to serve the needs of all types and sizes of retailers from small and midsized to large enterprise clients and this platform seamlessly integrates with our marketplace.

We expect to deploy our enhanced ecommerce capability to all of our existing marketplaces by the end of calendar year 2018, while preparing for the retail liquidation marketplace launch soon thereafter. This initiative will further align our business processes to optimize our platform technology.

Finally, we anticipate the launch of a new consolidated marketplace on our LiquidityOne e-commerce platform in early calendar year 2019, which will serve as a single marketplace to search, find and buy any asset from across our network of market places.

We believe this single unified market place will drive increased traffic from our buyer base through more efficient marketing strategies and provide our buyers with a more efficient method or sourcing our global supply available assets from the most recognizable sellers across the globe.

In closing our continued investments in our people, processes, technology platforms will enhance the value we bring to clients and drive our transformation. As we begin to harvest the investments we’re making over the next few years we’re 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 Jorge for more details on Q3 results..

Thank you Bill and good morning everyone. First I will comment on select third quarter results. We finished the third quarter of fiscal year 2018 above the company’s guidance range of GAAP, net loss, GAAP diluted EPS, adjusted EBITDA and non GAAP EPS.

Results were within the guidance range for GMV and compared to the third quarter last year GMV was up despite the completion of the DoD surplus contract. While our revenue was down $15 million as compared to the third quarter last year, it reflects the impact of completing our DoD surplus content.

Our GAAP net loss, adjusted EBITDA and adjusted net loss all improved by approximately $5 million year-over-year, demonstrating significant progress on our transformation initiatives for our segments.

As these third quarter results reflect, we are successfully executing on growing our segments despite the completion of the DoD surplus contract and more than offsetting the bottom-line impact of completing the DoD surplus contract.

In the third quarter we reported GMV of 153.6 million, reflecting year-over-year increases in our GovDeals segment and our RSCG segment. GovDeals GMV was up 13.1% from the third quarter of fiscal year 2017 driven by the additional sales volume from existing and new sellers.

RSCG GMV was up 11.6% from a year ago due to an increase in product flows from existing client accounts and new business development efforts. This was partly offset by a 20.5% year-over-year decrease in our CAG segment although this was reflecting the lower volume of goods sold under both our DoD surplus and CAG contracts.

Partly offsetting both the DoD contracts, GMV from our tag commercial business was up 13% as compared to a year ago.

We reported third quarter of fiscal year 2018 revenue of $50.6 million that reflected the growth in our GovDeals and RSCG segments offset by decreases in our CAG segment due to the DoD contract as compared to the third quarter of fiscal year 2017.

In line with the year-over-year GMV change GovDeals' revenue increased 12.8% and RSCG increased 11.7%, while revenue from our CAG segment was down 56.4% compared to the first quarter of fiscal year '17, largely effected again by the completion of our DoD surplus contract.

Our GAAP net loss was point $3.7 million, a $4.9 million improvement compared to $8.6 million loss a year ago. Adjusted net loss was $2.3 million a $4.7 million improvement from a $7 million loss in the prior year quarter.

And finally, our adjusted third quarter EBITDA was negative $230,000, a $5 million improvement compared to losing $5.2 million in the prior year third quarter.

These significant improvements were due to strong growth in our RSCG and GovDeals segments, realignment of our [Indiscernible] business and the restructure of our CAG segment and corporate functions as well as lower technology expenses related for our LiquidityOne transformation program. We continue to have a debt free balance sheet.

At June 30, 2018 we had a cash balance of $93.4 million. Capital expenditures during the quarter were $900,000 and we expect capital expenditures for the fourth quarter of fiscal year 2018 to remain in line with the current run rate.

Looking ahead we anticipate that the fourth quarter of fiscal year 2018 will reflect similar trends to what we saw in the third quarter of 2018 albeit sequentially affected by the seasonally low fourth quarter in our GovDeals and RFCG segments.

Additionally, we expect our overall spending for the LiquidityOne initiative to be in the $0.5 million to $1.5 million range for the quarter, and this reflects an increase in costs sequentially related to trading on the new platform, final UAT and other key activities before our next go live.

Overall, our fourth quarter fiscal year 2018 guidance and year-over-year comparisons reflect continued organic growth excluding the DoD contracts, and the benefits from our business realignment and restructuring actions we took in late 2017 and early fiscal year 2018.

Our guidance for the fourth quarter of 2018, continues to reflect the year-over-year improvements in adjusted EBITDA despite the completion of the DoD surplus contract. Lastly, we expect our recent acquisition of Machinio to be cash flow neutral but to have a temporary U.S. GAAP dilutive impact on fourth quarter 2018 U.S.

GAAP results due to the adjustment of its deferred revenue to fair value at the time of acquisition to reflect U.S. GAAP purchase accounting rules. However, this adjustment will not affect our adjusted EBITDA.

Management's guidance for the next fiscal quarter is as follows; we expect GMV for Q4 of 2018 to range from $140 million to $160; a GAAP net loss is expected for Q4 2018 to be in the range of negative $8.5 million to a negative $5.8 million; corresponding GAAP loss per share for the fourth quarter of 2018 ranging from a negative $0.26 to a negative $0.18 per share.

We estimate non-GAAP adjusted EBITDA for Q4 of 2018 to range from a negative $4 million to a negative $2 million, a non-GAAP adjusted loss per share is estimated for the fourth quarter of 2018 in the range of negative $0.20 to a negative $0.12 per share.

This guidance assumes that we will have diluted weighted average shares outstanding for the quarter of approximately 32.4 million and an effective tax rate in the single-digits. We will now take your questions..

[Operator Instructions] And our first question comes from the line of Colin Sebastian from Robert W. Baird. Your line is now open..

Bill, I guess you get closer to the point where more the LiquidityOne transformation has taking place, you talked about some of the cost efficiencies available after that point.

So I wonder, if you have any better visibility now in terms of where you see normalized EBITDA margins over the medium and long-term on the heading and then I have a couple of follow-ups..

First, the LiquidityOne investments both relates to driving a streamlined and more safe leverage technologies back in the business, so there operating efficiency. Also there is huge capabilities that are being created to drive growth and that growth is starting to reflect in the top line results resumption of organic growth from last few quarters.

An example would be the return to management software platform, something that steadily is becoming embraced by existing and new clients.

Returns management is an industry wide need for both the large e-commerce and omnichannel retailers and even traditional brick-and-mortar retailers to track products that are returned and have a service that invalidates the product itself and the data related to that product to handle the logistics of the flow of goods from consumers back to return center from the store or the fulfillment center.

And to the financial management of reconciling credit serve between suppliers and retailers and then having somebody who can overlay the value recovery value of these assets that are now return, we handle all of that in the software platform and services, and were excited about that as a new capability.

Our current business trends Colin would imply that we would be restoring profitability as we move through fiscal 19 and at that point I think we have to further comment on a business mix to give guidance about our long-term profit margin.

I think it's interesting to note that during Q3 the self-service GMV was a majority of our business over 50% of our business and as you know from cover the company.

There's no inventory is very limited operational expense associated self-service the margins on GAAP revenue extremely high, and that's that sort of a around where the business is trending going forward.

And so we think about the business is driving you know consignment fees on the GMV transacted service fees, on things like the returns management platform.

With the recent acquisition of Machinio we now have over 2,200 equipment owners and dealers paying annual subscription recurring subscriptions, which is a much more visible recurring revenue stream so we'll be -- when we're prepared to talk about margins I will be focused as much on EBITDA margins as a percentage of GAAP revenue as any part of our business because we're moving the needle on self-service, on returns management service fees and in this new recurring subscription business that we've just launched through an acquisition.

.

That's helpful. As a follow-up with respect to the consolidated or unified marketplace launch next year wondering how aggressively you plan to support that launch. I assume there's obviously a fair bit of cross selling you can do with the other marketplaces.

And then whether you expect that to bring in incremental new buyers and sellers or is this more about creating higher levels of engagement and bidding activity among the existing buyer base?.

We think there's a latent untapped potential to boost recovery by having a more efficient marketplace that allows all of the assets available from our sellers to be showcased with our existing buyers.

So we think the lift from nearly further penetrating our existing buyers will justify and reward us for the investment in the new consolidated marketplace.

I would say that there'll some [paralellity] to the growth of the marketplace because we have tremendous existing set of buyers and I think they're going to find a user experience that they'll want to talk about and share in their industry categories and there are other ways to tap into the data that we've created through the individual legacy marketplaces, what assets are available for sale and also with our Machinio acquisition which catalogue on the order of $20 billion plus of used equipment is sitting unsold somewhere in the world.

So this is not going to be a massive brand building campaign really a further penetration of existing buyers cross pollinating the assets that we have for sale across our existing buyer base and then streamlining and simplifying the message on how we can give buyers a single destination to personalize what type of assets are important to them make that easy available through desktop, tablet, mobile and even some other avenues simply doing that will provide great improvement in recovery, which ultimately drive earnings leverage in our business..

That's helpful. And then maybe one housekeeping, were there any other factors in the client auction participants other than the wind down of the DoD contract? Obviously the health of the core segments outside of DoD looks pretty solid at this point..

No. I think you accurately stated that the loss of DoD volume means fewer transactions -- fewer options launched during the period which attracts new auction participants. So that surplus contract wind down, a fact that also the scrap contract was down year-over-year, principally due to volume and mix..

[Operator Instructions] And our next question comes from the line of Gary Prestopino from Barrington Research. Your line is now open..

Couple of questions here. Just for Jorge, with the Machinio that deferred revenue hit all gets booked in Q4.

Is that correct, there's no bleed over into the next fiscal year?.

No. The deferred revenue that is effectively adjusted down for fair value happens effectively before you acquire the company.

So when you the company begins to record revenue as part of liquidity services it will only report what is newly generating or maybe some small piece of the deferred revenue, depending on how the valuation exercise is completed this quarter..

So essentially there’s a reset of deferred revenue at the time of the acquisition that restores itself as those subscriptions renew over the subsequent 12 months?.

So the great majority of again of the deferred for Machinio, Machinio tends to -- for the most part enter into 12 month service contracts. So as we cycle through 12 months that number just gets smaller and smaller and smaller so you'll see the growth of Machinio.

We will see the growth of Machinio in GAAP revenue going up as we go and once we get through 12 months that impact basically goes away..

I guess the way I should maybe phrase the question is just as majority of the expense hit related to that whole issue taken in Q4, or am I just totally misunderstanding that, so what's going on here?.

It's not an expense question as much as you -- their expenses will stay the same its just that you’re not recognizing GAAP revenue to the expense side.

So what happens is that in the very first quarter which is our fourth quarter there is going to be the largest impact of them not having that GAAP revenue being recorded and number gets smaller every quarter thereafter so the biggest impact would be in the coming quarter and then it just progressively gets smaller over the next 12 months..

Okay. That’s fine. And then Bill, I just want to get back to you the roll outs of the remaining LiquidityOne platform.

I was under the impression, again this my impression, I could have been wrong, is that everything was going to be done by the end of this calendar year and now I think in your narrative, you said that there's going to be two platforms in fiscal '19 that are going to be rolled out and one more for the rest of this year or could you just maybe lay that out for us?.

Yeah, the statement that I made and to clarify is that all of our existing marketplaces will be rolled on to the LiquidityOne platform by the end of calendar 2018, with one exception, which is the retail liquidation.com marketplace.

We looked at that business and the product roadmap and we made the decision to launch that in early 2019, for a few reasons.

One is we've made significant gains in our self-service business and we prioritized the launch of our self service marketplaces during calendar '18 that would be our AuctionDeals and GovDeals marketplaces that's based on market demand and growth as it should be.

The second initiative that has been prioritized is our LiquidityOne returns management software platform. The demand for that platform from clients ahead of the holiday season is very high.

They have in place that system to track and manage returns and provide with great customer experience for their buyers which anyone who follows retail knows that that's a huge effort. So we have made those investments and I think we'll be able to share you know wins along the way as we move from the summer to the end of the year.

And then the retail liquidation marketplace which is -- does business at liquidation.com will move over in early 2019 and it also has peak holiday season volumes and we're very judicious about supplying new software in the peak volume periods of holiday season.

So it's a natural solution to move through the peak season and then launch liquidation.com onto the new platforms. The other marketplaces on it are seasonally busy in the December January timeframe.

Let me also add to your second question, when I talk about a new consolidated marketplace, this is a marketplace that will reside on the same LiquidityOne e-commerce platform. It just will have a different brand, and that brand will envelop all of the property we have across every legacy branded marketplace.

And I think we will test with a lot of AB testing on the recovery rates generated from buyers' experience in the new brand versus the legacy brands, and as we get that data and feedback we are likely to simplify our brand architecture over time.

So for example, if you think of a company like Layfair, Layfair historically had many, many individual brands and launched a new unified brand and over time made the decision to simplify its brand architecture. There are many other industry examples of that type of activity and so that gives hopefully some context of what we're talking about..

No that's fine.

So I guess just a general question, looks like the spending on technology has sequentially come down over the last three quarters, and would we anticipate that you'd still see given that you got a lot of these marketplaces now on that it continues to sequentially move down Q4 and then throughout '19?.

Yeah I think it’s appropriate to give credit to Roger Bradley, our Chief Information Officer, and a number of the team members in this area who have maintained a very high amount of volume and output of work in a very efficient way.

And I think they have taken steps to introduce new functionality which starts to taper off the one-time project costs associated with building things new again some of the maintenance and that's one reason why the glide path of expenses has come down.

We reconfigured the product management team to include mainly software developers and business managers within the business unit. So I think the reorganization that Roger's led has been well-received and the glide path I think will continue on reducing overall corporate overhead in the technology area as we move into fiscal '19 and beyond.

Simply as a result of maintaining fewer systems front-end and back-end and those systems being well-developed, very efficient and more of our business is running in the cloud. And so when we need to the scalability we pay for it and when we don't, we don't have that overhead of fixed costs.

So I think that's a, that's a positive trend in the business for us Gary..

Okay good.

And then lastly, you talked about your returns management product, and I do recall that you had one prior to doing the LiquidityOne initiative but what has changed as far as the functionality of what you're putting in place now versus what you had years ago that is making it so attractive for your retailers who want to use it?.

Right, well I think if you just think of a two-by-two matrix, we have a do-it-for-you solution which we even call full service offerings which is allowing retail to manufactures use our distribution centers to move the product, have that product inspected and manifested ultimately either return to a third party or donated or sold.

And then we have a self service offering which is the clients leveraging their own facilities and their own people to do things but leveraging you know our software and data and sales channels and I think the shift for us has been the adoption of an interest in self service solutions.

And so we've configured our returns management platform to serve these self service customers as a enterprise software suite and you know essentially Software-as-a-Service and that's something that's getting a lot of attention and interest..

Do you charge a fee for the self service?.

Yes..

So it's all bundled in.

You charge out and then you're not giving it away to attract GMV?.

Correct, we're not giving it away, no..

Okay, thank you..

And I'm showing no further questions. I will now turn the call back to Julie Davis for closing remarks..

Thank you all for participating in today's call. If you have additional questions please reach out to me and we can set up a follow-up. Thanks again and have a good afternoon..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program and you may all disconnect. Everyone have a great day..