Liquidity Services, Inc. Announces Third Quarter 2007 Financial Results

Liquidity Services, Inc. (NASDAQ: LQDT; www.liquidityservicesinc.com) today reported its financial results for its fiscal third quarter ended June 30, 2007 (Q3-07). Liquidity Services, Inc. is a leading online auction marketplace for wholesale, surplus and salvage assets. Liquidity Services, Inc. (LSI or the Company) reported record consolidated Q3-07 revenue of $52.5 million, representing a growth rate of approximately 36% when compared to the prior year’s comparable period, and record adjusted EBITDA of $5.8 million, representing a growth rate of approximately 46% when compared to the prior year’s comparable period. LSI also reported record GMV of $62.3 million for Q3-07, representing a growth rate of approximately 34% when compared to the prior year’s comparable period. GMV is the total sales volume of all merchandise sold through our marketplaces during a given period. Net income in Q3-07 was a record $3.1 million or $0.11 diluted earnings per share. Adjusted net income in Q3-07 was a record $3.4 million, representing a growth rate of approximately 34% when compared to the prior year’s comparable period, or $0.12 adjusted diluted earnings per share, representing a growth rate of approximately 33% when compared to the prior year’s comparable period. LSI enables buyers and sellers to transact in an efficient, automated online auction environment. The Company’s marketplaces provide professional buyers access to a global, organized supply of wholesale, surplus and salvage assets presented with digital images and other relevant product information. Additionally, LSI enables its corporate and government sellers to enhance their financial return on excess assets by providing a liquid marketplace and value-added services that are integrated into a single offering. The Company organizes its products into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, and scrap metals. The Company’s online auction marketplaces are www.liquidation.com, www.govliquidation.com and www.liquibiz.com. LSI also operates a wholesale industry portal, www.goWholesale.com, that connects advertisers with buyers seeking products for resale and related business services. The Company’s ability to create liquid marketplaces for wholesale, surplus and salvage assets generates a continuous flow of goods from its corporate and government sellers. This flow of goods in turn attracts an increasing number of professional buyers to the marketplaces. "Q3 was another strong quarter for LSI as growth in our commercial business accelerated and our scrap business with the Department of Defense (DoD) continued to post impressive gains,” said Bill Angrick, Chairman and CEO of LSI. "Our performance during the quarter reflected solid execution of our business strategy as our commercial business grew approximately 126% over the prior year period. Our commercial GMV has grown more than three-fold during the past seven quarters and represents the largest segment of our business at approximately 47% of GMV during Q3. Our scrap business with the Department of Defense (DoD), which grew approximately 54% over the prior year period, also contributed to strong growth in GMV and Adjusted EBITDA during the quarter. We believe Q3-07 results demonstrate that large corporations are increasingly relying on our online platform and service offerings to realize greater returns and efficiencies in the tracking and sale of surplus and salvage assets. Our business development activity remains strong and we continue to test and develop capabilities to meet the long term needs of our clients and to support a much larger commercial business. Our buyer marketplace continues to deliver strong results for our sellers as we averaged over 5 auction participants per completed transaction during Q3.” Business Outlook The following forward-looking statements are based on current business trends and our current operating environment, including (i) the reengineering of certain business and inventory processes in our Surplus business with the Department of Defense (DoD), which has resulted in a slowdown of property received by the DoD, (ii) our expectation that there will be a modest increase in the flow of goods received by the DoD over the next quarter; (iii) our belief that we have yet to realize the full potential of recent significant investments in new distribution centers, personnel, and value-added services necessary to support a much larger commercial business in the future, which has resulted in less than our target profitability; (iv) our expectation that we will experience a seasonal slow down in supply from several of our historical commercial sellers during the next quarter; (v) our expectation that we will not continue the sale of certain products during the next quarter following the completion of a pilot program, because we were not able to come to satisfactory terms with the client; and (vi) the acquisition of STR Inc., which closed on October 16, 2006. Our results may be materially affected by changes in business trends and our operating environment, as well as by other factors, including investments we expect to make in our infrastructure and value-added services to support new business in both commercial and public sector markets. Our Scrap contract with the DoD includes an incentive feature, which can increase the amount of profit sharing distribution we receive from 20% up to 22%. Payments under this incentive feature are based on the amount of scrap we sell for the DoD to small businesses during the preceding 12 months as of June 30th of each year. We earned $1.0 million under this incentive feature for the 12 months ended June 30, 2007 and we recorded this amount in the quarter ended June 30, 2007. We are eligible to receive this incentive in each year of the term of the Scrap contract. In addition, there are incentive features in our Surplus contract that allow us to earn up to an additional 5.5% of the profit sharing distribution above our new base rate of 25%, which began December 1, 2006. For the purposes of providing guidance regarding our projected financial results for fiscal year 2007, we have assumed that we will not receive any of the Surplus contract incentive payments, as the period we would be eligible to record such incentive may not occur until fiscal year 2008. Our guidance adjusts EBITDA and Diluted EPS for the effects of the adoption of FAS 123R, which we estimate to be approximately $525,000 to $575,000 for the fourth quarter of fiscal year 2007. GMV – We expect GMV for fiscal year 2007 to range from $232 million to $234 million. We expect GMV for Q4-07 to range from $57 million to $59 million. Adjusted EBITDA – We expect Adjusted EBITDA for fiscal year 2007 to range from $18.8 million to $19.0 million. We expect Adjusted EBITDA for Q4-07 to range from $4.2 million to $4.4 million. Adjusted Diluted EPS – We estimate Adjusted Earnings Per Diluted Share for fiscal year 2007 to be $0.40. In Q4-07, we estimate Adjusted Earnings Per Diluted Share to be $0.09. We plan to provide specific guidance for fiscal year 2008 during our next earnings announcement, which will be subsequent to the conclusion of our fiscal year end September 30, 2007. We expect GMV and Adjusted EBITDA will increase approximately 25% and 30%, respectively, for fiscal year 2008. Key Q3-07 Operating Metrics Registered Buyers — At the end of Q3-07, registered buyers totaled approximately 649,000, representing a 33% increase over the approximately 489,000 registered buyers at the end of Q3-06. Auction Participants — Auction participants, defined as registered buyers who have bid in an auction during the period (a registered buyer who bids in more than one auction is counted as an auction participant in each auction in which he or she bids), increased to 287,000 in Q3-07, an approximately 10% increase over the approximately 261,000 auction participants in Q3-06. Completed Transactions — Completed transactions increased to approximately 54,000, an approximately 7% increase for Q3-07 from the approximately 50,000 completed transactions in Q3-06. In addition, we experienced a 25% increase in the average value of our transactions, over the same period, resulting from product mix, lotting and merchandising strategies, and buyer demand. GMV and Revenue Mix — GMV and revenue continue to diversify due to the continued rapid growth in our commercial and scrap businesses. As a result, the percentage of GMV and revenue derived from the DoD Surplus Contract (under which our revenue is based on the profit-sharing model) has decreased to 25.3% and 30.0%, respectively, versus 46.4% and 55.9%, respectively, in the prior year period. The percentage of GMV and revenue derived from our commercial marketplaces business, which includes the acquired STR business and our Liquidation.com marketplace, increased to 46.6% and 35.1%, respectively, from 27.5% and 10.7%, respectively, in the prior year period. The table below summarizes the GMV and revenue from the Company’s two significant contracts with the DoD (Surplus and Scrap), and our commercial and international businesses. GMV Mix Q3-07 Q3-06 Profit-Sharing Model: Surplus 25.3 % 46.4 % Scrap 24.6 % 21.3 % Total Profit Sharing 49.9 % 67.7 %   Commercial Marketplaces: Consignment Model 23.1 % 25.2 % Purchase Model 23.5 % 2.3 % Total Commercial Marketplaces 46.6 % 27.5 %   International and Other 3.5 % 4.8 % Total 100.0 % 100.0 % Revenue Mix Q3-07 Q3-06 Profit-Sharing Model: Surplus 30.0 % 55.9 % Scrap 29.2 % 25.7 % Total Profit Sharing 59.2 % 81.6 %   Commercial Marketplaces: Consignment Model 7.2 % 8.0 % Purchase Model 27.9 % 2.7 % Total Commercial Marketplaces 35.1 % 10.7 %   International and Other 5.7 % 7.7 % Total 100.0 % 100.0 % Liquidity Services, Inc. Reconciliation of GAAP to Non-GAAP Measures EBITDA and Adjusted EBITDA. EBITDA is a supplemental non-GAAP financial measure and is equal to net income plus (a) interest income and expense and other income, net; (b) provision for income taxes; (c) amortization of contract intangibles; and (d) depreciation and amortization. Our definition of Adjusted EBITDA differs from EBITDA because we further adjust EBITDA for stock compensation expense. Three Months Ended June 30, Nine Months Ended June 30, 2007 2006 2007 2006 (in thousands) (unaudited) Net income $ 3,053 $ 2,355 $ 7,840 $ 5,751 Interest expense (income) and other expense (income), net (475 ) (454 ) (1,624 ) 120 Provision for income taxes 2,134 1,416 5,422 3,654 Amortization of contract intangibles 203 203 610 610 Depreciation and amortization   355   179   935   501   EBITDA 5,270 3,699 13,183 10,636 Stock compensation expense   526   263   1,409   324   Adjusted EBITDA $ 5,796 $ 3,962 $ 14,592 $ 10,960 Adjusted Net Income and Adjusted Basic and Diluted Earnings Per Share. Adjusted net income is a supplemental non-GAAP financial measure and is equal to net income plus tax effected stock compensation expense. Adjusted basic and diluted earnings per share are determined using Adjusted Net Income. Three Months EndedJune 30, Nine Months EndedJune 30, 2007 2006 2007 2006 (Unaudited) (Dollars in thousands, except per share data) Net income $ 3,053 $ 2,355 $ 7,840 $ 5,751 Stock compensation expense (net of tax)   310   158   831   194   Adjusted net income $ 3,363 $ 2,513 $ 8,671 $ 5,945   Adjusted basic earnings per common share $ 0.12 $ 0.09 $ 0.31 $ 0.26   Adjusted diluted earnings per common share $ 0.12 $ 0.09 $ 0.31 $ 0.23   Basic weighted average shares outstanding   27,857,115   27,347,778   27,720,937   22,930,351   Diluted weighted average shares outstanding   28,321,395   28,291,280   28,215,689   25,397,329 Conference Call The Company will host a conference call to discuss the fiscal third quarter 2007 results at 5 p.m. Eastern Time today. Investors and other interested parties may access the teleconference by dialing (800) 573-4754 or (617) 224-4325 and providing the participant pass code 60841357. A live web cast of the conference call will be provided on the Company’s investor relations website at http://www.liquidityservicesinc.com. A replay of the web cast will be available on the Company’s website until September 3, 2007 at 11:59 p.m. ET. An audio replay of the teleconference will also be available until September 3, 2007 at 11:59 p.m. ET. To listen to the replay, dial (888) 286-8010 or (617) 801-6888 and provide pass code 78238344. Both replays will be available starting at 7:00 p.m. on the day of the call. Non-GAAP Measures To supplement the Company’s consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures of certain components of financial performance. These non-GAAP measures include earnings before interest, taxes, depreciation and amortization (EBITDA), Adjusted EBITDA and Adjusted Net Income and Adjusted Earnings Per Share. These non-GAAP measures are provided to enhance investors’ overall understanding of our current financial performance and prospects for the future. We use EBITDA and Adjusted EBITDA: (a) as measurements of operating performance because they assist us in comparing our operating performance on a consistent basis because the measures do not reflect the impact of items not directly resulting from our core operations; (b) for planning purposes, including the preparation of our internal annual operating budget; (c) to allocate resources to enhance the financial performance of our business; (d) to evaluate the effectiveness of our operational strategies; and (e) to evaluate our capacity to fund capital expenditures and expand our business. We believe these non-GAAP measures provide useful information to both management and investors by excluding certain expenses that may not be indicative of our core operating measures. In addition, because we have historically reported certain non-GAAP measures to investors, we believe the inclusion of non-GAAP measures provides consistency in our financial reporting. These measures should be considered in addition to financial information prepared in accordance with generally accepted accounting principles, but should not be considered a substitute for, or superior to, GAAP results. A reconciliation of all non-GAAP measures included in this press release, to the most directly comparable GAAP measures, can be found in the financial tables included in this press release. Supplemental Operating Data To supplement our consolidated financial statements presented in accordance with GAAP, we use certain supplemental operating data as a measure of certain components of operating performance. LSI reviews GMV because it provides a measure of the volume of goods being sold in its marketplaces and thus the activity of those marketplaces. GMV and our other supplemental operating data, registered buyers, auction participants and completed transactions also provide a means to evaluate the effectiveness of investments that we have made and continue to make in the areas of customer support, value-added services, product development, sales and marketing and operations. Therefore, we believe this supplemental operating data provides useful information to both management and investors. In addition, because LSI has historically reported certain supplemental operating data to investors, we believe the inclusion of this supplemental operating data provides consistency in our financial reporting. This data should be considered in addition to financial information prepared in accordance with generally accepted accounting principles, but should not be considered a substitute for, or superior to, GAAP results. Forward-Looking Statements This document contains forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These statements include, but are not limited to, statements regarding the Company’s business outlook. You can identify forward-looking statements by terminology such as "may," "will," "should," "could," "would," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues" or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this document. Important factors that could cause our actual results to differ materially from those expressed as forward-looking statements are set forth in our filings with the SEC from time to time, and include, among others, our dependence on our contracts with the DoD for a significant portion of our revenue; our ability to successfully expand the supply of merchandise available for sale on our online marketplaces and attract and retain active professional buyers to purchase the merchandise. There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this document and are expressly qualified in their entirety by the cautionary statements included in this document. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances occurring after the date of this document or to reflect the occurrence of unanticipated events. Liquidity Services, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands)   June 30, 2007 September 30, 2006 (Unaudited) Assets Current assets: Cash and cash equivalents $ 37,103 $ 54,359 Short-term investments 18,988 12,289 Accounts receivable, net of allowance for doubtful accounts of $200 4,076 2,557 Inventory 14,302 4,704 Prepaid expenses and other current assets   3,467   2,002 Total current assets 77,936 75,911 Property and equipment, net 4,209 2,362 Intangible assets, net 4,729 4,909 Goodwill 11,306 3,678 Other assets   2,254   1,178 Total assets $ 100,434 $ 88,038 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 2,319 $ 2,073 Accrued expenses and other current liabilities 7,416 5,283 Profit-sharing distributions payable 6,217 7,736 Customer payables 5,167 6,658 Current portion of capital lease obligations and long-term debt   23   79 Total current liabilities 21,142 21,829 Capital lease obligations and long-term debt, net of current portion 37 44 Other long-term liabilities   1,476   413 Total liabilities 22,655 22,286 Stockholders’ equity: Common stock, $0.001 par value; 120,000,000 shares authorized; 27,875,498 and 27,584,608 shares issued and outstanding at June 30, 2007 and September 30, 2006, respectively 28 27 Additional paid-in capital 59,946 55,964 Accumulated other comprehensive income 452 247 Retained earnings   17,353   9,514 Total stockholders’ equity   77,779   65,752 Total liabilities and stockholders’ equity $ 100,434 $ 88,038 Liquidity Services, Inc. and Subsidiaries Unaudited Consolidated Statements of Operations (Dollars in Thousands, Except Per Share Data)   Three Months EndedJune 30, Nine Months EndedJune 30, 2007 2006 2007 2006   Revenue $ 52,505 $ 38,750 $ 146,952 $ 108,058 Costs and expenses: Cost of goods sold (excluding amortization) 13,441 3,442 33,601 8,405 Profit-sharing distributions 17,409 20,534 53,869 59,423 Technology and operations 8,125 5,321 24,365 14,115 Sales and marketing 3,556 2,411 9,745 6,326 General and administrative 4,704 3,343 12,189 9,153 Amortization of contract intangibles 203 203 610 610 Depreciation and amortization   355   179   935   501   Total costs and expenses   47,793   35,433   135,314   98,533   Income from operations 4,712 3,317 11,638 9,525 Interest income (expense) and other income, net   475   454   1,624   (120 )   Income before provision for income taxes 5,187 3,771 13,262 9,405 Provision for income taxes   (2,134 )   (1,416 )   (5,422 )   (3,654 )   Net income $ 3,053 $ 2,355 $ 7,840 $ 5,751   Basic earnings per common share $ 0.11 $ 0.09 $ 0.28 $ 0.25   Diluted earnings per common share $ 0.11 $ 0.08 $ 0.28 $ 0.22   Basic weighted average shares outstanding   27,857,115   27,347,778   27,720,937   22,930,351   Diluted weighted average shares outstanding   28,321,395   29,291,280   28,215,689   25,397,329 Liquidity Services, Inc. and Subsidiaries Unaudited Consolidated Statements of Cash Flows (In Thousands)   Three Months EndedJune 30, Nine Months EndedJune 30, 2007 2006 2007 2006 Operating activities Net income $ 3,053 $ 2,355 $ 7,840 $ 5,751 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 558 382 1,545 1,111 Stock compensation expense 526 262 1,409 324 Amortization of debt discount — — — 15 Interest expense related to put warrant liability and debt issue costs — — — 315 Provision (benefit) for doubtful accounts — 50 — 150 Loss on early extinguishment of debt — — — 171 Changes in operating assets and liabilities: Accounts receivable (289 ) (81 ) (1,519 ) (1,150 ) Inventory (2,510 ) (302 ) (7,821 ) (853 ) Prepaid expenses and other assets 492 (506 ) (2,540 ) (620 ) Accounts payable (1,145 ) (86 ) 247 507 Accrued expenses and other 2,387 2,267 2,101 5,344 Profit-sharing distributions payable (4,175 ) (1,956 ) (1,519 ) 2,604 Customer payables (2,527 ) (396 ) (1,566 ) 891 Other long-term liabilities   14   16   1,062   49   Net cash (used in) provided by operating activities (3,616 ) 2,005 (761 ) 14,609 Investing activities Purchases of short-term investments (14,197 ) (5,242 ) (28,594 ) (13,663 ) Proceeds from the sale of short-term investments 5,421 — 21,887 — Decrease (increase) in goodwill and intangibles 27 (52 ) 12 (70 ) Cash paid for acquisitions — — (10,232 ) — Purchases of property and equipment   (614 )   (239 )   (2,282 )   (1,083 )   Net cash used in investing activities (9,363 ) (5,533 ) (19,209 ) (14,816 ) Financing activities Proceeds from issuance of debt 10 — 10 47 Repayments of debt (5 ) (4 ) (13 ) (4,410 ) Principal repayments of capital lease obligations (4 ) (36 ) (61 ) (107 ) Proceeds from exercise of common stock options and warrants (net of tax) 259 99 748 128 Incremental tax benefit from exercise of common stock options 81 — 781 — Net proceeds from the issuance of common stock   (282 )   (28 )   1,046   43,996   Net cash provided by financing activities 59 31 2,511 39,654 Effect of exchange rate differences on cash and cash equivalents   57   166   203   193   Net (decrease) increase in cash and cash equivalents (12,863 ) (3,331 ) (17,256 ) 39,640 Cash and cash equivalents at beginning of the period   49,966   53,349   54,359   10,378   Cash and cash equivalents at end of period $ 37,103 $ 50,018 $ 37,103 $ 50,018 Supplemental disclosure of cash flow information Cash paid for income taxes $ 624 $ 1,160 $ 5,584 $ 3,248 Cash paid for interest $ 1 $ 3 $ 4 $ 214