Everyone loves a bargain, and Liquidity Services (NASDAQ:LQDT) caters to that fact with a simple business model: take surplus items that companies and government agencies no longer want and act as an intermediary to sell them to willing customers. That basic idea produced impressive profits for Liquidity Services for years, but coming into Thursday morning's fiscal fourth-quarter financial report, investors were worried that the company's reversal of fortune earlier this year would continue to affect its results. Let's look at the numbers Liquidity Services reported for the quarter and the full year and see what they tell about the road ahead.
A loss for Liquidity Services
For the fourth quarter, Liquidity Services continued to see its business slow, with overall revenue declining more than 8% year over year. Total sales volume of all the goods sold on Liquidity Services' marketplaces fell 11%, and a precipitous 18% decline in the company's fee income also weighed on total revenue. On the earnings side, Liquidity Services suffered even worse, with steady increases in costs of technology and operations, sales and marketing, and goods sold taking a huge bite out of the bottom line and leaving the company with a loss of $0.02 per share. Even after adjusting for stock-based compensation and other items, Liquidity Services suffered a 70% drop in adjusted net income, yielding EPS of 0.13 per share -- less than investors had expected to see.
The full fiscal 2014 showed similar declines for Liquidity Services. Adjusted net income came in 43% below 2013's level, with total revenue down 2% and gross merchandise volume falling 4% for the year. On a positive note, Liquidity Services continued to grow its customer base, with 8% more registered buyers than it had in the previous year and a 3% rise in auction participants.
Much of the difficulty facing Liquidity Services stems from major changes to its core business. CEO Bill Angrick blamed the shortfall in Liquidity Services' results on "the changing mix and volume of our current Department of Defense surplus contract, weakness in our energy marketplace, and integration costs associated with our capital assets group." The company has made efforts to reverse that outward tide, and Angrick highlighted a fourth-quarter rebound in energy, along with growing business from state and municipal governments, as offsetting some of the negative effects of a less favorable Pentagon product mix. With a wider scope of potential clients to serve, Liquidity Services hopes to have a better 2015.
Keeping expectations low
Nevertheless, despite its long-term efforts, Liquidity Services isn't promising a quick turnaround. Angrick said he sees "continued uncertainty regarding the mix and volume of property [and] final scope and timing of our new DoD non-rolling stock surplus contract" as likely to "dampen our growth and earnings results throughout FY-15." Liquidity Services took the extraordinary step of discontinuing its full-year guidance, instead looking only a quarter ahead. On that note, the company expects adjusted earnings per share of $0.16 to $0.22 for the fiscal first quarter, well below the $0.25 per share that shareholders had hoped to see.
That won't stop Liquidity Services from continuing its long-run strategy of further investment in its business. The company has established a strongly centralized information technology team to help coordinate technology assets and make its marketplaces run more efficiently. In addition, Liquidity Services has unified its sales, marketing, and operations functions in order to make its capital-assets business more attractive to customers. Aggressive investment will sustain these efforts, but it will also reduce net income in the short run.
Many investors might well be disappointed by Liquidity Services' results and the sluggish pace of its turnaround efforts. However, the company appears to be doing its best to evolve in the face of a fundamental shift in its business mix. As difficult as that process is, Liquidity Services has seen its share price fall far enough that a successful recovery could lead to a substantial long-term bounce for the stock.