What happened

Shares of Liquidity Services (NASDAQ:LQDT) closed 13.4% lower on Thursday following Wednesday evening's release of solid second-quarter results with a side of weak third-quarter earnings guidance.

So what

In the second quarter, Liquidity Services saw top-line sales fall 17% lower year over year, to $60.1 million. The company serviced a 7% lower gross merchandise volume. Adjusted net losses shrank from $0.21 to $0.12 per diluted share. The analyst consensus had called for a net loss of $0.14 per share on revenues near $60.2 million, so it was technically a mixed quarter but nearly in line with Street expectations.

Looking ahead, the liquidator of surplus inventories and equipment expects non-GAAP third-quarter losses of approximately $0.26 per share. Therein lies the rub, since your average Wall Street analyst was looking for a smaller $0.09 loss per share in the next reporting period.

Liquidity Services' corporate logo.

Image source: Liquidity Services.

Now what

The modest third-quarter estimates assume stronger sales in the government segment. Commercial orders should be roughly in line with the same period of 2017.

The recent wind down of an expired surplus contract with the U.S. Department of Defense (DoD) is weighing on Liquidity Services' top line, while the company continues to incur costs related to DoD warehouse closures. In the long run, the company is integrating its marketplaces into a single service and the lost DoD contract was a low-margin deal that will leave room for more profitable operations in its place.

The stock had gained 31% year to date before this plunge, thanks to a strong first-quarter report, and investors remain in the black for 2018 so far. Volatility is a fact of life when you're investing in small-cap businesses with unpredictable order flows.

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