Lqdt Military
Source: Liquidity Services.

For years, Liquidity Services (NASDAQ:LQDT) has taken the unwanted surplus goods that government agencies and private companies have in their inventories and found ways to squeeze some revenue from reselling them. Yet the company has taken some big hits to its business lately, and coming into Thursday morning's fiscal third-quarter financial report, investors in Liquidity Services had already braced themselves for some ugly financial results. Unfortunately, it performed even worse on the top line than most investors had expected, as fallout from the energy sector contributed to its woes. Let's take a closer look at Liquidity Services and see whether the surplus seller has a good chance of bouncing back in the near future.

Liquidity Services keeps sliding down a slippery slope
Even though investors hadn't expected much from the company, Liquidity Services' fiscal third-quarter results were still disappointing. Sales of $89.7 million were down 29% from the year-ago quarter, and they were significantly worse than the 24% decline that most investors were prepared to see from Liquidity Services. On the bottom line, the company suffered a bigger drop even after taking some favorable tax considerations into account, and while adjusted earnings of $0.14 per share were better than the $0.10-per-share consensus estimate, they were nevertheless down by more than half from year-ago levels.

Some of the difficulties that Liquidity Services is going through were evident in its operating metrics. The decline in auction participants accelerated during the quarter, falling 8% to 611,000. Although the number of registered buyers climbed above 2.8 million, the number of completed transactions dropped by 10,000 to 137,000.

Moreover, Liquidity Services once again saw an adverse shift toward consignment-model sales. The key GovDeals unit makes up more than a quarter of the company's gross market value of sales, but it only brings in about 6% of its revenue. By contrast, purchase-model sales fell in GMV terms for the quarter, hurting margins and making Liquidity Services' revenue mix less favorable. That trend has been ongoing, posing long-term challenges for the surplus seller going forward.

CEO Bill Angrick blamed the shortfall on a combination of factors. "We continued to drive operational efficiencies despite a decline in the top line," Angrick said, but "we experienced weaker than expected results in our commercial capital assets business as macro trends in our energy business affected pricing and overall volumes." Nevertheless, the CEO was pleased that its government business helped Liquidity Services climb into the top part of its guidance range for gross market value and adjusted operating income.

A cloudy outlook for Liquidity Services
In addition to its past performance, investors also have to deal with ongoing uncertainty about the future for Liquidity Services. The company said that it is still waiting for final specifications and timing under its new contract with the Department of Defense, which is expected to take effect after the current contract expires in mid-November. Moreover, with declining levels of capital spending in the oil and gas industry, it said that it will be difficult to predict whether overall improvement in global macroeconomic conditions will have a positive impact on its business.

Nevertheless, what Liquidity Services did say about the coming quarter was far from optimistic. Adjusted earnings for the fiscal fourth quarter will likely come in between breakeven and $0.02 per share, and gross market value of sales should end up somewhere between $150 million and $175 million, representing a sequential decline of as much as 22%.

Liquidity Services stock responded badly to the news, with shares falling more than 4% in the two hours of pre-market trading following the announcement. Long-term investors need to look closely at whether the company's LiquidityOne transformation plan successfully results in a new strategic vision that can serve its customers and raise more interest in its surplus sales. Without a change in direction, it could be tough for Liquidity Services to break out of its downward trend and find new ways to grow.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Liquidity Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.